COST  ACCOUNTING 

THEORY  AND  PRACTICE 


BY 

J.  LEE  NICHOLSON,  C.P.A. 

OF  J.   LEE   NICHOLSON   &   CO.,   CERTIFIED    PUBLIC   ACCOUNTANTS; 
FACTORY      COST     SPECIALIST  ;      AUTHOR      OF      "FACTORY 
ORGANIZATION  AND  COSTS"  AND  "COST  ACCOUNT- 
ING";   INSTRUCTOR    IN    COST    ACCOUxNTING 
AT      COLUMBIA      UNIVERSITY 


RONALD   ACCOUNTING   SERIES 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 

1913 


■'■,^^- 


COPYRIGHT,  1913. 

BY 

THE  RONALD  PRESS  COMPANY 


6in£ral  Stattm^nt  jof  ^bitorial  §oartr 


Applicable  to  all  books  of  the 
Ronald  Accounting  Series 


THE  manuscripts  of  the  books  forming  the 
Ronald  Accounting  Series  have  been  sub- 
mitted to  us  and  have  been  approved  by  us  for 
publication. 

In  some  cases  the  authors  express  views  that 
are  not  fully  in  accord  with  those  entertained  by 
us.  but  in  no  instance  are  such  differences  of 
sufficient  importance,  in  our  judgment,  to  warrant 
the  withholding  from  publication  of  a  meritorious 
work. 

J.  E.  Sterrett 

Robert  H.  Montgomery 


290043 


PREFACE 

Considering  the  number  of  books  that  have  been  written 
on  cost  accounting  within  the  last  four  or  five  years,  it  may 
be  appropriate  to  give  some  reason  for  adding  another  to 
the  fast-increasing  hst. 

In  this  vohime  the  author's  main  purpose  is : 

( 1 )  To  provide  for  the  pubHc  accountant  and  cost 
accountant  a  reference  book  deaHng  in  a  direct  manner  with 
the  practical  parts  of  cost  accounting. 

(2)  To  present  the  principles  and  methods  of  cost 
accounting  in  a  simple  and  direct  manner,  so  that  the 
student  may  be  able  to  grasp  them  quickly,  unhampered  by 
dissertations  on  organization,  efficiency  and  the  importance 
of  cost  accounting  generally. 

(3)  To  furnish  the  manufacturer  with  a  work  contain- 
ing all  the  important  practical  points  in  connection  with 
cost  accounting,  summarized  and  briefly  explained. 

It  is  not  the  author's  intention  to  present  this  work  as 
a  reference  book  dealing  with  factory  organization  and  effi- 
ciency methods,  or  to  undertake  to  present  all  that  might 
be  said  on  the  subject  of  costs.  On  the  contrary,  while 
omitting  no  cost  details  of  importance,  it  has  been  his  aim 
to  reduce  to  a  minimum,  so  far  as  language  is  concerned, 
the  explanations  and  descriptions  essential  to  a  clear  presen- 
tation of  the  workings  of  cost  accounting. 


The  author  takes  pleasure  in  acknowledging  his  indebt- 
edness to  Mr.  John  F.  D.  Rohrbach,  B.C.S.,  New  York,  for 


PREFACE 

the  preparation  of  the  four  system  charts  in  this  book,  and 
to  Mr.  Newman  D.  Waffle,  M.A.,  for  carefully  reading  and 
criticizing  the  manuscript. 

J.  Lee  Nicholson. 
New  York,  September  i,  19 13. 


CONTENTS 


Chapter  I.    Cost  Finding  and  Its  Functions 

Various  Phases  of  Efficiency  Progress 

General  Functions  of  Cost  Accounting 

Cost  Accounting  as  Related  to  General  Accounting 

Functions  of  a  Cost  System 

Application  of  Cost  Principles 

Chapter  II.    Elements  of  Costs 

Direct  Charges 

Indirect  Charges 

Indirect  Expense 

Items  Composing  the  Indirect  Expenses 

Rent,  Taxes  and  Insurance 

Depreciation,  Maintenance  and  Repairs 

Power  Costs 

Small  Tools 

Experimental  Work 

Over,  Short,  and  Damage 

Interest 

Production  Costs  and  Selling  Costs 

Administrative  Expenses 

Relation  of  Cost  Elements  to  Selling  Price 

Chapter  III.     Interest  in  Its  Relation  to  Cost 

Should  Interest  Be  Included  in  Cost? 
Interest  as  a  Charge  Against  Costs 
Interest  a  Profit — Not  a  Cost 
Bibliography 

VII 


VIII  CONTENTS 

Chapter  IV.     Principles  and  General  Methods  of  Cost  Finding 

Calculating  Costs 

Applying  Cost  Charges 

Machine  Cost  Method 

Types  of  Systems 

Analysis  of  Operations 

Direct  Production  Departments 

Material  Costs 

Labor  Costs 

Distribution  of  Indirect  Expenses 

Chapter  V.     Methods  of  Distributing  Indirect  Expenses 

1.  Direct  Labor  Cost 

2.  Direct  Labor  Hours 

3.  Direct  Labor  and  Material  Cost 

4.  New  Pay  Rate 

5.  Old  Machine  Rate 

6.  New  Machine  Rate 

7.  Fixed  Machine  Rate 
Miscellaneous  Methods 


Chapter  VI.     Wage  Systems 

L  Day  Rate 

2.  Piece-Work 

3.  Differential   (Piece)   Rate  Plan 

4.  Premium  Plan 

5.  Bonus  Plan 

5a.  Gillette  and  Dana  Bonus  Plan 

5b.  Differential  Bonus  Plan 

5c.  Gantt  System 

5d.  Sundry  Bonus  Systems 

6.  "Stint"  System 

7.  Contract  System  and  List  Percentage  System 
8-9.  Profit  Sharing  and  Stock  Distributing 


Chapter  VII.     Recording  the  Material  and  Labor  Costs 


Requirements  of  Cost  Finding 
Recording  the  Material  Cost 
1.     Purchase  Requisition 


CONTENTS 

2.  Purchase  Order 

3.  Material   Received  Sheet 

4.  Stock   Record — Raw   Material 

5.  Production  or  Factory  Order 

6.  Material   Requisition  or   Rill  of  Material 

7.  Inventory  Test 
Recording  the   Labor  Cost 
Requisites  of  Time  Reports 
Forms  of  Time  Reports 

Daily  Time  Report  (Forms  26,  27) 
Weekly  Time  Report 
Daily  Time   Report   (Form  29) 
Daily  Time  Record   (Forms  30-33) 
Self-Figuring  Time   Card 


Chapter  VIII.     Compiling  the  Cost  Data 

Records  and  Forms  Generally  Used 

Purchase  Journal 

Accounts  Payable  Voucher 

Register  of  Accounts  Payable 

Material  Received  Summarj' 

Report  of  Material  Delivered 

Pay-Roll 

Analysis  of  Pay-Roll 

Statement  of  Factory  Expenditures 

Process  and  Machine   Cost  Records 

Production  Report  or  Production  Summary 

Defective  Work  Report 

Cost  Sheets 

Record  for  Part-Finished  and  Finished  Stock 

Billing  and  Shipping  Records 

Credit  Certificate 

Register  of  Sales  and  Costs 

Cost  Journal 

Operating  or  Factory  Ledger 

1.  Raw  Material  and  Supplies  Account 

2.  Labor  Account 

3.  Indirect  Expense  Account 

4.  Work  in  Process  Account 

5.  Part-Finished  Stock  Account 

6.  Finished  Stock  Account 

7.  General  or  Private  Ledger  Account 
Illustrative  Journal  Entries 


X  CONTENTS 

Chapter  IX.    Control  of  the  Cost  Records  by  the  Financial  Records 

Methods  of  Controlling  Cost  Records 

Sales  Accounts 

Selling  Expenses 

Administrative   Expenses 

Monthly  Profit  and  Loss  Statement 

Balance  Sheet 

Salesmen's  Costs 

Plant  and  Tool  Records 


Chapter  X.     The  Examination  of  a  Plant 

Reasons  for  Examination 

Procedure 

Raw  Material  and  Storeroom 

Power,  Machinery  and  Processes 

Labor 

Indirect  Expenses 

Efficiency 

Organization 

Mechanical  Aids 

Ventilation 

Leaks 

Summary 

Details  of  Examination  Information 

1.  Purchase  Division 

2.  Receiving  Department 

3.  Storeroom 

4.  Dry  Kilns 

5.  Power  Department 

6.  Manufacturing — General 

7.  Manufacturing  Departments 

8.  Repair  Department 

9.  Foundry 

10.  Plating-Room 

11.  Wood-Working  Shops 

12.  Assembling 

13.  Packing  Department 

14.  Shipping  Department 

15.  Sales  Division 

16.  General 


CONTENTS 

Chapter  XI.     Devising  a  Cost  System 

Co-operation  of  Management  and  Employees 

Fitting  the  System  to  Existing  Conditions 

Red  Tape 

Reports  for  Executives 

Cost  Period 

General  Outline  of  Systems 

Estimating  Cost  Systems 

Departmental  System 

Special  Order  and  Product  Systems 

Charts  of  Cost  Systems 

General  Description  of  Entries 

Subsidiary  Records 

Method  of  Control 

Forms  and  Designs 

Chapter  XII.    Estimating  Cost  Systems 

Purpose  and  Kinds 

Advantages 

First  Plan  of  Estimating  Costs 

Schedule  of  Estimated  Costs 

Inventory  Sheet 

Analysis  of  Cost  of  Sales 

Verification  Under  First  Plan 

Second  Plan  of  Estimating  Costs 

Purchase  Journal 

Pay-Roll 

Verification  Under  Second  Plan 

Third  Plan  of  Estimating  Costs 

Schedule  of  Estimated  Costs 

Inventory  Sheet 

Analysis  of  Cost  of  Sales 

Purchase  Journal 

Material  Requisition 

Summary  of  Material  Requisitions 

Time  Report 

Pay-Roll 

Verification  Under  Third  Plan 

Profit  and  Loss  Statement 


xu  CONTENTS 

Chapter  XIII.     Departmental  Systems 

Departmental  and  Estimating  Cost  Systems 

Scope  of  the  Departmental  System 

Conditions  Where  Applicable 

Methods  and   Principles 

Forms  Used 

Purchase  Journal 

Factory  Order 

Bill  of  Material 

Time  Report 

Analysis  of  Pay-Roll 

Register  of  Sales 

Department  Accounts 

Work  in  Process  Method 


Chapter   XIV.     Special   Order   System   Based   on  the   Productive 
Labor  Method 

Introduction 

Purchase  Requisition 

Purchase  Order 

Report  of  Material  Received 

Purchase  Journal 

Stock  Record — Raw  Material 

Production  Order  and  Cost  Sheet  (a) 

Material  Requisition 

Report  of  Material  Delivered 

Employees'  Time  Report 

Pay-Roll 

Production  Order  and  Cost  Sheet  (b) 

Stock  Record — Finished  Product 

Bill  and  Shipping  Order 

Credit  Certificate 

Register  of  Sales  and  Costs 

Inventory  Test 


Explanation  of  Chart  and  Summary  of  Entries 
Subsidiary  Forms  and  Records 
Method  of  Control 
Profit  and  Loss  Statement 
Balance  Sheet 


CONTENTS  XI 

Chapter  XV.     Special  Order  System  Based  on  the  Process  or 
Machine  Method 

Purchase  Requisition 

Purchase  Order 

Report  of  Material  Received 

Accounts  Payable  Voucher 

Register  of  Accounts  Payable 

Stock  Record — Raw  Material 

Production  Order  and  Cost  Sheet 

Material  Requisition 

Report  of  Material  Delivered 

Employees'  Time  Report 

Pay-Roil 

Analysis  of  Factory  Expenditures 

Process  Card  Record 

Power  Cost  and  Distribution 

Production  Order  and  Cost  Sheet 

Other  Forms  Used 

Explanation  of  Chart  and  Summary  of  Entries 

Subsidiary  Forms  and  Records 
Method  of  Control 
Factory  Ledger  Accounts 


Chapter  XVI.    Product  System  on  the  Productive  Labor  Method 

Purchase  Forms 

Report  of  Material  Received 

Accounts  Payable  Forms 

Stock  Record — Raw  Material 

Production  Order 

Material  Requisition 

Report  of  Material  Delivered 

Employees'  Time  Report 

Pay-Roll 

Defective  Work  Report 

Factory  Ledger 

Statement  of  Factory  Expenditures 

Summary  of  Production   and   Costs 

Stock — Finished  Product 

Other  Forms  Used 


XIV  CONTENTS 

Explanation  of  Chart  and  Summary  of  Entries 
Subsidiary  Forms  and  Records 
Method  of  Control 

Chapter  XVII.    Product  System  Based  on  the  Machine  or  Process 

Method 
Production  Order 
Employees'  Time  Report 
Pay-Roil 

Analysis  of  Pay-Roll 
Analysis  of  Factory  Expenditures 
Forms  for  Applying  Costs 
Production  Report 
Cost    Sheet 
Other  Forms  Employed 

Explanation  of  Chart  and  Summary  of  Entries 
Subsidiary  Forms  and  Records 
Method  of  Control 


FORMS 
Chapter  XVIII.     Forms  Relating  to  Material 

FORM 

1.     Purchase  Requisition 

2a.  Purchase  Order  (original) 

2b.  Purchase  Order  (duplicate) 

2)0.  Report  of  Material  Received  (original) 

Zb.  Report  of  Material  Received  (duplicate) 

4a.  Report  of  Material  Received   (original) 

Ab.  Report  of  Material  Received  (duplicate) 

5.  Purchase  Journal 

6.  Purchase  Journal 

7a.  Accounts  Payable  Voucher  (face) 
7b.  Accounts  Payable  Voucher  (reverse) 
8(?.  Accounts  Payable  Voucher  (face) 
8/;.  Accounts  Payable  Voucher  (reverse) 
9a.  Register  of  Accounts  Payable  (left) 
96.  Register  of  Accounts  Payable  (right) 

10.  Raw  Material  Stock  Record 

11.  Raw  Material  Stock  Record 

12.  Raw  Material  Stock  Record 


CONTENTS 
Chapter  XIX.     Production  Orders  and  Requisitions 

FORM 

13.  Factory  (or  Production)   Order 

14.  Factory  (or  Production)  Order 

15a.  Production  Order  and  Cost  Sheet   (original) 
15b.  Production  Order  and  Cost  Sheet  (duplicate) 
16a.  Production  Order  and  Cost  Sheet  (original) 
16&.  Production  Order  and  Cost  Sheet  (duplicate) 
17a.  Factory  or  Production  Order  (original) 
17b.  Factory  or  Production  Order  (duplicate) 

18.  Material  Requisition   (Bill  of  Material) 

19.  Material  Requisition  (Bill  of  Material) 

20.  Material  Requisition   (Bill  of  Material) 

21.  Material  Requisition   (Bill  of  Material) 

22.  Material  Requisition   (Bill  of  Material) 

23.  Material  Requisition   (Bill  of  Material) 

24.  Summary  of  Material  Requisitions   (Report  of  Material 
Delivered) 

25.  Report  of  Material  Delivered 

Chapter  XX.    Time  Reports  and  Pay-RoU  Forms 

FORM 

26.  Daily  Time  Report 

27.  Daily  Time  Report   (Employees'  Time  Report) 

28.  Weekly  Time  Report 

29.  Daily  Time  Report 

30.  Daily  Time  Record   (Employees'  Time  Report) 

31.  Daily  Time  Record 

32.  Daily  Time  Record   (Employees'  Time  Report) 

33.  Daily  Time  Record   (Employees'  Time  Report) 
34a.  Self-Figuring  Time  Card 

34b.  Self-Figuring  Cost  Card   (face) 

34r,  Self-Figuring  Cost  Card   (reverse) 

35.  Analysis  of  Pay-Roll 

36.  Analysis  of  Pay-Roll 

37.  Pay-Roll 

38.  Pay-Roll 

39.  Pay-Roll 

40.  Pay-Roll 


XVI  CONTENTS 

Chapter  XXI.     Summaries  of  Production  and  Cost 

FOBM 

41.  Analysis  of  Factory  Expenditures 

42.  Statement  of  Factory  Expenditures 

43a.  Statement  of  Factory  Expenditures   (left) 
43b.  Statement  of  Factory  Expenditures   (right) 
44a.  Statement  of  Factory  Expenditures  (upper  part) 
44b.  Statement  of  Factory  Expenditures  (lower  part) 

45.  Process  Card  Record   (Process  and  Machine  Cost  Record) 

46.  Power   Cost   and   Distribution    (Process  and    Machine   Cost 

Record) 

47.  Production  Report  or  Summary 

48.  Production  Report  or  Summary 

49.  Production  Report  or  Summary 

50.  Production  Report  or  Summary 

51.  Defective  Work  Report 

52.  Schedule  of  Estimated  Costs  (Cost  Sheet) 

53.  Cost  Sheet 

54.  Cost  Sheet  (Summary  of  Production  and  Costs) 
55a.  Cost  Sheet  (left) 

55&.  Cost  Sheet  (right) 


Chapter  XXII.     Forms  Relating  to  Finished  Product,  Sales  and 
Financial  Records 

FOBM 

56.  Finished  Stock  Record  (Record  for  Part-Finished  and  Finished 

Stock) 

57.  Finished  Stock  Record  (Record  for  Part-Finished  and  Finished 

Stock) 

58.  Finished  Stock  Record  (Record  for  Part-Finished  and  Finished 

Stock) 

59.  Finished  Stock  Record  (Record  for  Part-Finished  and  Finished 

Stock) 

60.  Inventory  Test 

61.  Inventory  Sheet 

62a.  Shipping  and  Billing  Record  (original) 
62b.  Shipping  and  Billing  Record  (duplicate) 
62c.  Shipping  and  Billing  Record   (triplicate) 
63a.  Credit  Certificate  (original) 
63b.  Credit  Certificate   (duplicate) 

64.  Register  of  Sales  and  Costs 

65.  Register  of  Sales  and  Costs  (Analysis  of  Cost  of  Sales) 


CONTENTS 

66.  Salesmen's  Costs 

67.  Operating  or  Factory  Ledger 

68a.  Monthly  Profit  and  Loss  Statement  (left) 

6Sb.  Monthly  Profit  and  Loss  Statement  (right) 

69a.  Balance  Sheet  (left) 

69b.  Balance  Sheet  (right) 

70a.  Plant  and  Tool  Record  (face) 

70b.  Plant  and  Tool  Record  (reverse) 


CHARTS 


PAGE 

1.  Special  Order  System 198a 

Productive  Labor  Method 

2.  Special  Order  System 214a 

Process  or  Machine  Method 

3.  Product  System 226a 

Productive  Labor  Method 

4.  Product  System 236a 

Process  or  Machine  Method 


COST  ACCOUNTING 

Theory   and  Practice 


CHAPTER  I 

COST    FINDING   AND    ITS    FUNCTIONS 

The  importance  of  efficiency  in  business  organization 
has  never  been  so  generally  recognized  as  at  the  present 
time,  and  the  subject  presents  an  even  greater  field  for 
development  in  the  future.  One  indication  of  this  is  the 
increased  volume  of  literature  that  is  now  available  on  the 
subject.  More  than  90%  of  this  literature  has  been  pub- 
lished in  the  last  decade,  and  fully  75%  in  the  last  five 
years. 

The  ultimate  causes  of  this  are  to  be  found  in  the  broad 
field  of  economics.  The  gradual  absorption  and  develop- 
ment of  natural  resources,  the  exploitation  of  new  fields  of 
commerce,  the  increase  of  population,  the  higher  standards 
of  living  and  greater  complexities  of  demands  in  modern 
life — these  are  but  a  few  of  the  innumerable  influences 
reflected  in  the  industrial  life  of  today. 

Transformed  to  some  extent,  these  changes  meet  the 
manufacturer  in  the  form  of  demands  for  more  wages  and 
better  labor  conditions,  in  the  increased  cost  of  materials, 
19 


20  COST   ACCOUNTING 

and  in  a  much  keener  competition  in  every  phase  of  manu- 
facturing and  selHng  his  product.  He  must  either  adapt 
his  methods  to  meet  the  situation,  or  retire  from  the  field. 
Only  one  practicable  road  lies  before  him,  and  that  is  a 
keener  realization  of  the  existing  possibilities  in  his  busi- 
ness. To  be  specific,  he  must  eliminate  waste  of  every 
kind,  and  plan  his  organization  so  as  to  increase  the  pro- 
duction per  unit  of  cost,  which  is  another  way  of  saying  he 
must  introduce  efficiency  methods. 

Various  Phases  of  Efficiency  Progress 

This  search  for  efficiency  appears  in  many  phases  which 
overlap  each  other,  more  or  less.  From  the  mechanical 
standpoint,  it  involves  a  study  of  plant  location  and  con- 
struction, new  and  better  types  of  machines,  economies  in 
producing  and  using  power,  etc.  From  the  labor  standpoint, 
it  has  given  rise  to  new  and  improved  methods  of  wage 
payment,  such  as  the  differential  rate  plan  and  the  premium 
and  bonus  methods  with  their  various  modifications,  all  of 
which  offer  increased  pay  for  greater  individual  effort  and 
efficiency.  Even  the  motions  and  positions  of  the  workmen 
are  being  analyzed  into  their  component  parts,  with  the 
view  of  eliminating  those  unessential  to  the  process  in  hand. 
While  some  of  these  methods  are  still  novelties,  yet  the  time 
is  not  far  distant  when  most  manufacturers  will  have  to  do 
something  of  this  kind  for  their  own  salvation. 

From  the  standpoint  of  factory  organization,  more  has 
been  attempted  and  accomplished,  because  the  need  has  been 
pressing  and  immediate.  The  purpose  here  is  to  bring  the 
activities  of  the  whole  plant,  no  matter  how  widespread, 
under  the  direct  review  and  control  of  the  management.  It 
is  felt,  and  rightly  so,  that  a  considerable  loss  is  incurred 
unless  efficient  systems  and  reliable  statistics  enable  the 
management  to  keep  in  touch  with  the  various  steps  of 


COST    FINDING   AND    ITS    FUNCTIONS  2 1 

production,  and  to  locate  the  responsibility  for  waste,  lost 
time,  shop  errors,  etc. 

Quite  as  essential  in  its  bearing-  on  efficiency  is  the 
process  of  cost  finding;  that  is,  finding  just  what  it  costs  to 
manufacture  a  certain  order  or  article.  Not  only  is  this 
necessary  to  determine  possible  selling  prices,  but  it 
provides  the  ultimate  measure  by  which  manufacturing 
methods  may  be  compared,  and  the  best  selected. 

General  Functions  of  Cost  Accounting 

Wliile  the  present  book  treats  primarily  of  cost  account- 
ing, it  would  be  a  mistake  if  its  scope  were  limited  to  finding 
costs  only.  Any  good  cost  system,  properly  operated, 
performs  two  distinct,  though  related,  functions. 

The  first,  w^hich  may  be  called  the  direct  function,  is  that 
of  ascertaining  actual  costs. 

The  second,  or  indirect  function,  is  that  of  supplying,  in 
its  system  of  reports,  the  information  necessary  to  organize 
the  many  departments  of  a  factory  into  working  units,  and 
to  direct  their  activities  in  accord  with  some  definite  plan. 

Cost  Accounting  as  Related  to  General  Accounting 

Cost  accounting,  as  a  science,  is  a  branch  of  general 
accounting.  Its  province  is  to  analyze  and  record  the  cost 
of  the  various  items  of  material,  labor  and  indirect  expense 
incurred  in  the  operation  of  a  factory,  and  to  so  compile 
these  elements  as  to  show  the  total  production  cost  of  a 
particular  piece  of  work. 

With  the  cost  books  once  established,  the  best  modem 
usage  is  to  incorporate  their  record  in  total  in  the  general 
financial  books.  In  this  way  the  modern  cost  system  builds 
up  an  interlocking  series  of  accounts  which  furnish  the 
material  for  a  detailed  study  of  the  operations  of  a  manu- 
facturing business. 


22  COST   ACCOUNTING 

The  accounts  which  appear  in  the  cost  books,  however, 
differ  in  nature  and  scope  from  those  in  the  general  financial 
books.  The  latter  exhibit  the  complete  record  of  the  finan- 
cial and  commercial  transactions  of  the  company,  whereas 
the  former  treat  only  of  those  transactions  which  deal  with, 
and  are  properly  chargeable  to,  the  manufacture  of  the  prod- 
uct. Like  the  general  books,  the  cost  records  show  the 
amounts  spent  for  material,  supplies,  labor  and  indirect 
expenses;  but  in  addition  there  appear  accounts  with  the 
various  operating  departments,  classifications  of  the  product, 
part-finished  stock,  etc.  It  is  these  latter  accounts  that 
make  an  analysis  of  costs  possible. 

Functions  of  a  Cost  System 

The  functions  performed  by  a  cost  system  with  respect 
to  increasing  the  efticiency  of  a  plant  from  an  organization 
standpoint  may  be  noted  under  the  following  heads : 

(i)  The  records  provide  for  a  perpetual  inventory,  and 
also  for  the  preparation  of  monthly  statements  showing  the 
industrial  and  financial  condition  of  a  company. 

(2)  The  cost  of  each  article  or  class  of  product  being 
separately  shown,  the  management  has  invaluable  data  at 
hand  to  guide  it  in  making  changes  of  policy  or  methods. 

(3)  Comparative  costs  for  different  periods  and  under 
different  conditions  are  obtainable. 

(4)  The  records  provide  for  following  the  material  from 
the  raw  state  until  it  is  finished  product,  and  for  ascertain- 
ing the  time,  labor  and  expense  involved  in  its  manufac- 
ture. In  this  way  losses  of  material,  wasted  time,  defective 
work,  poor  foremanship,  and  various  other  '"leaks"  are 
detected. 

(5)  A  cost  system  supplies  the  information  necessary  to 
standardize  the  work  of  a  plant. 

The  five  items  above  mentioned  are  not  to  be  regarded  as 


COSr    FINDING    AND    ITS    FUNCTIONS 


23 


a  brief  for  the  value  of  cost  systems,  but  rather  as  an 
analysis  showing  the  lines  along  which  a  cost  system 
influences  the  factory  organization. 

Application  of  Cost  Principles 

The  principles  underlying  cost  finding  have  all  been  ana- 
lyzed and  defined ;  but  when  it  comes  to  the  actual  installa- 
tion of  cost  accounts,  the  greatest  skill  and  caution  must  be 
observed  in  applying  these  principles  to  the  conditions  that 
exist.  No  two  manufacturing  plants  are  alike,  not  even  in 
the  same  line  of  business.  Every  plant  has  peculiarities 
that  bear  upon  the  methods  of  cost  finding;  and  this  makes 
each  factory  a  problem  in  itself.  It  follows  that  in  either 
writing  or  reading  a  treatise  on  the  subject,  this  distinction 
should  be  clearly  conceived.  The  knowledge  of  principles, 
without  a  corresponding  familiarity  with  the  facts  and  con- 
ditions of  manufacturing,  produces  the  theoretical  cost 
finder,  who  is  apt  to  be  a  nuisance.  On  the  other  hand,  it  is 
only  the  shallow  thinker  who  trusts  to  a  superficial  study  of 
forms  and  accounting  practices,  with  the  idea  that  such 
knowledge  prepares  him  to  go  into  any  business  and  install 
a  cost  system.  To  attain  success  in  cost  work,  one  must  see 
and  understand  the  application  of  the  principles  to  the  con- 
ditions which  actually  exist. 


CHAPTER  II 

ELEMENTS    OF    COSTS 

Production  costs  are  classified  into  three  principal  divi- 
sions, known  as  the  elements  of  costs : 

(i)   Material 
(2)   Labor 
(  3  )   Expense 

These  may  be  subdivided  into : 

/   N    T«T        •  1  (  Direct 

,   .    ^    ,       (  Direct  or  productive 

(2)  Labor  <  j    ,■      ^  ,     ^. 

'^   ■^  [  Indirect  or  non-productive 

(3)  Expense  {  fj^'ect 

Direct  Charges 

"Direct  Charges"  is  that  element  of  cost  that  enters 
into,  and  can  be  charged  directly  to,  the  product. 

The  cost  of  the  substance  out  of  which  the  product  is 
made  is  the  direct  material  charge;  the  cost  of  the  labor 
applied  directly  to  the  productive  process  is  the  direct  labor 
charge ;  and  any  other  expense  that  can  be  charged  directly 
to  an  order,  job  or  process  may  be  included  as  a  direct 
24 


ELEMENTS   OF    COSTS  25 

charge  under  the  caption  "Direct  Expense."  The  expense 
of  workmen  in  traveling  to  and  from  a  job,  as  well  as  their 
hotel  expenses  while  engaged  out  of  town  on  a  particular 
job,  are  examples  of  direct  expenses. 

Direct  expense,  while  an  important  factor  of  cost  in 
some  lines  of  business,  rarely  enters  into  the  cost  calculations 
of  ordinary  manufacturing,  and  is  disregarded  in  the  pres- 
ent volume. 

Indirect  Charges 

Indirect  material  consists  of  such  material  as  factory 
supplies,  which,  while  used  in  processes,  either  does  not 
enter  into  the  product  itself,  or  else  enters  in  such  a  way  as 
not  to  be  chargeable  conveniently  to  any  particular  article. 

Indirect  or  non-productive  labor  is  that  used  in  repair- 
ing, handling,  supervision,  etc. — in  short,  any  labor  not 
expended  directly  on  the  article  or  process  itself. 

Indirect  expense  as  used  here  refers  only  to  those  ex- 
penses incurred  in  the  manufacturing  end  of  the  business 
which  are  properly  a  part  of  the  cost  of  production;  e.g., 
supervision,  repairs,  light,  power,  depreciation,  etc. 

Indirect  Expense 

All  expenses  and  charges  other  than  direct  charges  come 
under  the  general  head  of  "Indirect  Expense."  This  in- 
cludes indirect  material  and  indirect  labor,  as  well  as  the 
more  closely  delimited  "indirect  expense"  of  the  preceding 
section.  Indirect  expense  is  often  known  as  "Burden"  or 
"Overhead." 

Indirect  expenses,  as  a  class,  fall  into  two  divisions, 
depending  upon  how  they  are  to  be  apportioned  or  dis- 
tributed in  costs.  The  first  division  consists  of  those 
expenses  that  can  be  apportioned  to  individual  products  or 
certain  processes,   because  they  are  incurred  in  particular 


26 


COST   ACCOUNTING 


departments  of  the  factory,  while  the  second  is  made  up  of 
expenses  which  extend  over  the  plant  as  a  whole  and  must 
be  distributed  over  the  products  as  a  whole,  and  which  are 
therefore  designated  as  general  operating  expenses. 

Items  Composing  the  Indirect  Expenses 

The  following  list  shows  some  of  the  more  constant 
items  which  compose  the  indirect  expenses.  The  classifica- 
tion will  vary  in  almost  every  factory,  but  the  items  listed 
almost  invariably  appear. 


Indirect  material 

Taxes 

Oil 

Insurance 

Supplies 

Freight  and  express  inward, 

when  not  charges  to  direct 

material  cost 

Interest 
Depreciation  \ 
^Maintenance  \. 
c  Repairs 

Indirect  labor 

Power  or  power  plant 

Supervision 
Inspection 
Experimental  work 
Rent 

Light 

Heat 

Small  tools 

Over,  short  and  damage 

Rent,  Taxes  and  Insurance 

When  rent  is  paid,  it  is  generally  distributed  over  the 
different  departments  on  the  basis  of  floor  space  occupied. 

Taxes  are  a  part  of  the  general  operating  expenses,  as 
they  are  independent  of  department  value. 

Insurance,  on  the  other  hand,  is  partly  distributed  over 
the  plant  as  a  w^hole,  and  partly  over  each  department 
according  to  its  value. 

Depreciation,  Maintenance  and  Repairs 

Depreciation,   maintenance  and   repairs  are  distributed 


ELEMENTS    OF    COSTS  2/ 

between  the  plant  as  a  whole  and  its  departments,  depend- 
ing on  where  the  expenses  are  incurred. 

The  loss  of  value  due  to  depreciation  is  undoubtedly 
the  most  difficult  of  all  expenses  to  reduce  to  accurate 
figT-U'es,  because  there  are  so  many  elements  to  be  taken  into 
consideration.  For  instance,  the  general  nature  of  the 
e(iuipment.  the  length  of  service  to  be  expected,  the  amount 
of  use  per  day  or  month,  the  kind  of  business,  the  amount 
spent  for  maintenance  and  repairs,  and  the  likelihood  of 
new  methods  and  machinery,  are  a  few  of  the  more  impor- 
tant influences  that  determine  the  actual  amount. 

The  discussion  of  depreciation,  as  a  whole,  must  be  left 
to  special  books  on  that  subject.  The  province  of  the  pres- 
ent volume  extends  only  to  the  manner  of  its  treatment  in 
cost  finding;  and  here  depreciation  is  usually  disposed  of 
by  distributing  the  cost  of  the  equipment  of  a  plant  over  the 
product  it  turns  out  during  a  period  of  time  estimated  as 
the  life  of  the  equipment. 

There  are  two  general  ways  of  arriving  at  the  entries 
for  depreciation : 

(i)  Periodical  revaluation  of  all  the  property,  the  differ- 
ence between  any  two  consecutive  valuations  representing 
the  depreciation  for  the  period.  This  would  seem  to  be  the 
most  accurate  plan ;  but  practice  has  shown  that  such  re- 
valuation is  at  best  an  estimate,  which  must  be  based  on 
two  factors,  condition  and  earning  power.  The  gain  in 
accuracy,  if  any,  is  not  enough  to  justify  the  difficulty  and 
trouble  of  the  physical  revaluation,  except  at  long  intervals. 

(2)  A  more  common  method  is  to  estimate  the  life  of  a 
machine  or  building,  and  then  write  off  a  certain  per  cent 
of  its  value  each  year. 

Two  cautions  in  particular  must  be  observed  in  writing 
off  valuations  by  the  per  cent  method.  First,  the  estimates 
should  be  reviewed  at  intervals,  and  corrections  made  for 


28  COST   ACCOUNTING 

apparent  errors.  In  case  of  doubt  as  to  the  proper  rate,  it 
is  considered  better  policy  to  choose  the  higher  of  the  rates 
considered,  as  any  mistake  is  better  corrected  by  restoring 
values  where  they  belong  than  by  charging  the  Profit  and 
Loss  account. 

The  second  caution  relates  to  the  ground  covered  by 
single  calculations  of  depreciation.  The  same  per  cent 
must  not  be  extended  to  cover  complex  groups.  If  a  single 
per  cent  were  used  on  the  whole  plant,  the  result  would  be 
quite  untrustworthy,  since  the  true  rate  of  depreciation 
varies  in  different  parts,  depending  on  the  nature  and  cost 
of  machines,  amount  of  idle  time,  and  other  conditions.  To 
be  accurate,  each  element  of  equipment  should  have  its  own 
depreciation  rate. 

Power  Costs 

The  power  costs  are  somewhat  complex,  especially 
where  a  factory  produces  its  own  power.  The  power  plant 
is  regarded  as  a  department  by  itself,  and  bears  its  own 
assignment  of  direct,  as  well  as  certain  indirect,  expenses. 
If  the  power  plant  furnishes  heat  and  light  to  the  factory, 
the  cost  of  these  items  must  be  subtracted  from  the  total 
power  cost,  to  gtt  the  net  power  cost  applying  to  produc- 
tion centers.  To  obtain  accuracy,  it  is  generally  necessary 
to  segregate  and  distribute  the  power  costs  as  a  direct 
charge  to  each  department  or  machine.  The  net  power  cost 
is  usually  distributed  in  the  ratio  of  use,  thus  making  each 
machine  or  department  bear  its  share  of  unutilized  power, 
or  power  lost  in  transmission. 

The  calculation  of  the  power  actually  consumed  by  any 
machine  or  department  is  a  mechanical  problem.  There  are 
special  machines  for  the  purpose,  such  as  dynamometers 
for  steam-driven  machinery,  and  wattmeters  or  power 
factor  indicators  for  machines  using  electricity. 


! 


ELEMENTS   OF   COSTS 


29 

Small  Tools 

The  value  to  be  set  on  tools  made  in  the  plant  should 
include  all  the  elements  of  cost  that  enter  into  their  manu- 
facture. It  may  be  stated  as  a  general  principle  that  the 
cost  of  any  equipment  manufactured  by  the  plant  itself 
must  include  its  share  of  the  indirect  expenses  as  well  as 
the  labor  and  material  cost.  For  the  same  reason,  installa- 
tion charges  would  be  treated  as  a  part  of  the  cost  of  a 
machine. 

If  special  dies  or  tools  are  bought  or  made  for  a  par- 
ticular order,  the  total  cost  is  charged  against  that  order, 
unless  they  are  retained  after  its  completion,  and  an  allow- 
ance made,  either  on  their  scrap  value,  or  on  the  possibility 
of  their  being  of  some  future  use. 

Experimental  Work 

When  the  expenses  of  the  experimental  department 
arise  from  work  directed  on  the  current  product,  the  cost 
becomes  properly  an  item  of  indirect  expense ;  but  when  the 
expense  results  from  work  on  products  or  processes  that 
are  to  be  used  at  a  future  time,  the  correct  method  is  to 
make  a  deferred  charge  of  it,  which  will  not  be  absorbed 
until  the  results  of  the  experimental  work  are  in  actual 
operation.  In  practice,  however,  such  expenses  are  usually 
absorbed  in  current  indirect  expense,  and  are  not  treated  as 
deferred  charges  unless  they  are  large  enough  to  affect  the 
cost  calculations  perceptibly. 

Machines  and  appliances  that  are  perfected  through 
experiment  do  not  come  under  the  same  head,  but  should  be 
considered  as  assets,  their  theoretical  value  being  the  sum 
of  all  the  elements  of  cost  that  have  been  incurred  on  their 
behalf  during  the  course  of  the  experiments. 


30  COST   ACCOUNTING 

Over,  Short  and  Damage 

Wastes  of  material,  shrinkage  in  weight,  defective  work, 
etc.,  are  charged  to  Over,  Short  and  Damage  account. 
After  this  account  has  been  credited  with  the  value  received 
for  any  disposition  of  the  items  charged,  the  balance 
becomes  a  part  of  the  indirect  expenses. 

Interest* 

Interest,  as  an  expense,  is  generally  treated  according  to 
its  origin,  as  follows : 

( 1 )  Interest  on  mortgages,  as  a  part  of  the  rent 
charge. 

(2)  Interest  on  buildings  and  land  values,  as  one 
of  the  general  operating  expenses. 

(3)  Interest  on  the  value  of  different  machines 
or  equipment  of  different  manufacturing  depart- 
ments, as  a  charge  to  the  product  of  these  machines 
or  departments. 

Production  Costs  and  Selling  Costs 

A  clear  distinction  must  be  made  between  production 
costs  and  selling  costs.  The  latter  include  the  selling  ex- 
penses, such  as  advertising,  commissions,  salaries,  etc., 
which  are  necessary  elements  in  determining  the  price  for 
which  an  article  may  sell,  but  have  no  direct  bearing  on  the 
cost  of  producing  the  article  itself.  The  cost  of  production 
ends  when  the  finished  stock  is  ready  for  sale. 

Administrative  Expenses 

The  expenses  that  arise  from  advertising,  commissions, 
salaries  of  officers,  etc.,  are  known  as  commercial,  or  selling 
and  administrative  expenses. 

•See  Chapter  III,  "Interest  in  Its  Relation  to  Cost," 


ELEMENTS    OF    COSTS 


31 


SELLIMG 

PRICE 

175 

TOTAL  COST 

TO  SELL 

ISO 

Sp2  J       <  0  t5  ^ 

*^       1 

QC  fcj  0 

52 

PRIME 

COST 

75 

LABOR 
50 

MATERIAL 
25 

32  COST   ACCOUNTING 

The  segregation  of  administrative  expenses,  as  a  dis- 
tinct class,  is  sometimes  a  matter  of  convenience.  In  the 
majority  of  cases  the  time  of  the  administrative  force  is 
spent  in  supervising  the  selHng  organization,  in  solving 
problems  of  production,  and  in  looking  after  the  finances  of 
the  business.  Therefore,  administrative  expense  is  partly 
a  production  cost,  and  partly  a  selling  cost.  The  purposes 
of  cost  finding  are  best  served  by  separating  expenses  of 
such  a  nature  from  those  expenses  which  arise  from  pro- 
duction proper  and  its  direct  supervision. 

Relation  of  Cost  Elements  to  Selling  Price 

The  sum  of  the  direct  material  and  labor  cost  is  known 
as  the  "Prime  Cost."  This,  combined  with  the  indirect 
expenses,  gives  the  final  "Factory  Cost."  The  total  of  the 
selling  and  administrative  expenses,  plus  the  factory  cost, 
shows  the  cost  of  making  and  marketing  the  article;  and 
this  total — plus  the  profit — gives  the  actual  selling  price. 

This  relation  of  the  different  elements  may  be  illustrated 
by  the  diagram  on  the  preceding  page,  which,  in  the  light 
of  what  has  been  said,  is  self-explanatory. 


CHAPTER    III 

INTEREST  IN  ITS   RELATION  TO  COST 

Should  Interest  be  Included  in  Cost? 

As  there  is  a  difference  of  opinion  among  accountants 
as  to  treating  interest  as  a  cost  of  production,  the  views 
of  two  writers  of  prominence  are  quoted  at  length  in  the 
present  chapter,  and  reference  is  made  to  a  number  of 
articles  on  this  subject.  The  question  is  of  great  im- 
portance, and  therefore  the  views  set  forth  in  this  chapter 
should  be  considered  carefully,  and  the  articles  referred 
to  should  also  be  consulted  before  a  final  decision  is  made. 

The  author's  own  position  is  that  whatever  expense  is 
necessary  to  operate  a  plant  must  be  charged  against 
the  cost  of  the  product,  if  true  costs  are  to  be  obtained; 
and  as  it  is  just  as  necessary  to  have  buildings,  grounds 
and  machinery  as  it  is  to  have  workmen  for  manufacturing 
a  product,  these  factors  should  be  considered  in  ascer- 
taining costs,  especially  where  the  values  of  these  elements 
vary  in  relation  to  different  articles  manufactured. 

To  make  this  clear,  suppose  that  a  factory  is  pro- 
ducing several  articles  of  different  kinds,  some  of  w^hich 
necessitate  the  use  of  expensive  machinery  or  equipment, 
while  others  are  largely  the  product  of  hand  labor,  or 
cheap  machinery.  If  the  different  values  invested  are  not 
taken  into  consideration,  the  indirect  expenses  as  dis- 
tributed will  not  show  the  true  variation  that  exists  in 
the  costs.  The  unequal  burden,  resulting  from  the  differ- 
33 


34 


COST   ACCOUNTING 


ences  in  investment,  is  clearly  an  essential  factor;  and 
since  this  burden  is  a  direct  result  of  using  the  producing 
equipment,  it  seems  that  it  should  be  considered  as  one 
of  the  elements  of  cost. 

Of  course,  if  the  equipment  is  uniform,  or  if  all  the 
output  passes  alike  through  all  the  processes,  there  is  no 
essential  difference  between  including  the  interest  as  a 
cost  and  leaving  it  for  a  later  supplementary  calculation. 
Since,  however,  in  either  case,  the  amount  invested  must 
be  considered  in  determining  the  selling  price,  the  ques- 
tion still  remains  as  to  what  method  or  base  of  calcula- 
tion should  be  used.  It  may  be  interest  on  values,  or 
some  arbitrary  charge  based  on  time  or  other  conditions 
of  manufacturing. 

The  difference  of  opinion  then  centers  on  what  is  the 
best  method  of  applying  this  charge  to  the  cost;  that  is, 
whether  it  should  be  included  among  the  regular  cost 
items  and  become  a  part  of  the  accounting  system,  or 
only  be  added  to  the  cost  in  a  statistical  report. 

From  another  standpoint  the  objection  is  raised  against 
including  interest  cost  as  a  part  of  the  accounting  system, 
that  banks  in  many  cases  will  not  accept  the  valuation 
of  an  inventory  which  includes  interest  as  part  of  the 
cost  of  the  product. 

Interest  as  a  Charge  against  Costs 

The  following  article  on  "Interest  on  Investment  in 
Equipment,"*  by  William  Morse  Cole,  Assistant  Pro- 
fessor of  Accounting  in  Harvard  University,  presents  the 
view  that  interest  is  properly  a  cost  item,  and  should  be 
so  treated: 

Though  it  is  common  to  speak  of  cost  accounting 
as  if  it  were  different  in  nature  from  other  kinds  of  ac- 

*"Journal   of  Accountancy,"  April,  1913. 


INTEREST  IN  ITS  RELATION  TO  COST      35 

counting,  virtually  all  accounting  worthy  of  the  name  has 
for  a  prime  purpose  the  determination  of  cost.  Account- 
ing should  serve  as  a  guide  in  three  ways:  In  fixing 
prices  so  that  they  shall  be  adjusted  properly  to  costs;  in 
eliminating  waste  of  material,  of  labor,  and  of  burden 
charges;  and  in  determining  what  had  best  be  undertaken 
in  the  establishment  itself  and  what  had  best  be  purchased 
or  ordered  outside.  Since  these  three  purposes  are  the 
recognized  fundamental  purposes  of  cost  accounting,  it 
is  necessarily  true  that  whether  an  enterprise  is  con- 
cerned with  manufacturing,  distribution,  or  service,  its 
accounting  should  be,  in  a  sense,  cost  accounting. 

Let  us  examine  these  three  aims  in  turn. 

Prices  must  be  fixed  at  such  a  point  that  they  shall 
at  least  cover  (i)  materials,  or  goods;  (2)  labor,  or  serv- 
ice, and  (3)  expense  burden,  or  what  are  commonly  called 
"Overhead  Charges."  Obviously,  if  the  last  of  these  is 
not  quite  fully  covered,  the  continuance  of  production  or 
service  is  not  economically  advisable  (unless,  of  course, 
the  work  serves  other  purposes  than  those  which  are  im- 
mediately connected  with  the  initial  enterprise).  If, 
again,  the  income  provided  by  the  price  gives  less  than 
a  proper  amount  as  interest  on  the  investment — invest- 
ment in  the  form  of  capital  locked  up  in  machinery, 
facilities,  material,  or  waiting  product — the  return  is  not 
economically  sufficient  to  make  the  enterprise  self- 
supporting.  If  this  interest  is  not  included  in  the  expense 
burden,  therefore,  it  must  be  added  later,  somewdiere,  be- 
fore one  can  know  whether  the  return  is  adequate  to 
make  the  enterprise  self-supporting.  Since  one  of  the 
purposes  of  accounting  is  to  show  whether  the  return  is 
adequate,  the  interest  would  seem  necessarily  to  be  in- 
volved somewhere  in  the  accounting. 

Efficient  management  always  attempts  to  eliminate  as 


36 


COST    ACCOUNTING 


much  as  possible  of  excess  consumption  of  material,  excess 
expenditure  of  labor — both  mental  and  muscular — and 
excess  investment  in  machinery,  in  other  facilities,  and  in 
supplies.  The  best  guide  for  such  elimination  is  an 
analysis  of  these  various  elements,  so  that  comparison 
may  be  made  between  different  methods  and  between 
different  managements.  To  use  a  simple  illustration, 
there  may  be  a  choice  between  two  methods  as  follows: 
Machinery  at  a  cost  of  $35,000,  materials  at  a  cost  of  $5, 
and  labor  at  a  cost  of  $20;  or  machinery  at  a  cost  of 
$5,000,  material  at  $5,  and  labor  at  $30.  We  may  know, 
perhaps,  that  the  maintenance,  insurance,  and  taxes  on 
the  machinery  while  the  article  is  in  machine  process 
(that  is,  the  share  of  maintenance,  insurance,  and  taxes 
chargeable  on  this  particular  production)  will  be  $10  in 
the  first  case,  and  $1.50  in  the  second  case.  These  figures 
give  us  with  the  expensive  machinery  a  production-cost 
of  $35.00  (that  is,  $5  for  material,  $20  for  labor,  and  $10 
for  maintenance,  etc.),  and  of  $36.50  ($5  for  material,  $30 
for  labor,  and  $1.50  for  maintenance,  etc.)  with  the  less 
expensive  machinery.  Taking  no  account  of  the  interest, 
therefore,  the  investment  in  the  expensive  machinery 
appears  worth  while — if,  at  least,  our  production  is  so 
large  that  a  margin  of  $1.50  reduction  in  cost  on  each 
article  of  product  is  worth  while  when  set  against  the 
possibly  greater  error  in  our  estimate  of  depreciation,  etc. 
Yet  we  have  clearly  left  out  of  account  one  element  of  the 
problem,  for  until  we  know  the  length  of  time  for  which 
these  different  equipments  are  involved  in  production,  we 
do  not  know  whether  interest  on  the  greater  capital  in 
the  first  case  will  more  than  eat  up  the  margin  of  saving 
over  the  second.  If,  for  example,  the  machinery  is  em- 
ployed a  day  in  producing  this  article,  even  though  we 
use  as  low  a  rate  of  interest  as  3  per  cent,  there  is  in  the 


INTEREST    IN    ITS    RELATION    TO    COST  37 

expensive  machinery  an  additional  element  of  $3.50  in  in- 
terest for  the  one  day  involved  (on  a  300-day  basis),  but 
there  is  an  additional  charge  of  only  50  cents  in  interest, 
on  the  same  ground,  for  the  inexpensive  machinery.  This 
difference  in  favor  of  the  less  expensive  machinery  turns 
the  scale  of  advantage;  for  the  costs  are  now  $38.50  com- 
pared with  $37.  If,  on  the  other  hand,  the  machines  were 
employed  in  this  production  only  one  hour,  on  the  basis 
of  a  9-hour  day,  the  more  expensive  machinery  with  the 
lower  labor  cost  would  be  a  more  economical  means  of 
production;  for  since  the  interest  element  is  now  only  39 
cents,  its  total  is  $35.39,  but  the  total  for  the  other 
machine,  with  interest  of  6  cents,  is  $36.56.  It  is  abso- 
lutely essential,  therefore,  that  interest  be  taken  into 
consideration  in  determining  which  of  two  methods  of 
production  is  more  economical. 

The  same  sort  of  consideration  of  interest  is  essential 
in  attempting  to  determine  what  we  shall  make  in  our 
own  establishment  and  what  we  shall  order  outside;  for 
if  work  at  home  involves  investment  in  machinery,  or 
other  facilities,  so  that  we  must  get  a  return  of  $38.50 
from  our  ultimate  product  or  service,  but  we  can  pur- 
chase the  same  product  or  service  outside  for  $37,  it  is 
obviously  foolish  to  do  the  work  at  home — unless,  in- 
deed, our  freedom  from  outside  dependence  is  worth  to 
us  more  than  the  difference  in  cost,  or  unless  we  can  find 
no  employment  for  our  capital  elsewhere  at  a  rate  as  high 
as  that  which  we  have  used  in  our  calculation. 

No  comparison  is  possible  between  different  establish- 
ments, between  different  periods  in  the  same  establishment, 
or  between  different  methods  in  the  same  establishment, 
if  capital  investment  in  labor-saving  or  material-saving 
machinery  is  neglected;  for  the  very  purpose  of  such  in- 
vestment is  to  save  cost  in  other  directions;  and  to  neglect 


38 


COST   ACCOUNTING 


the  capital  sacrifice  made  in  saving  other  costs,  is  to 
neglect  in  part  the  very  aim  of  cost  accounting. 

Opponents  of  treating  interest  as  a  cost  may  admit 
the  need  of  knowing  the  figure  of  interest,  but  may  deny 
the  desirability  of  showing  it  on  the  books.  The  function 
of  an  accountant  is  to  analyze  a  situation  and  learn  the 
facts;  and  the  function  of  a  bookkeeper  is  to  record  the 
facts,  which,  if  not  recorded,  will  be  forgotten.  It  seems, 
therefore,  as  if  it  is  the  function  of  a  cost  accountant  to 
learn  regarding  interest  the  facts  which  will  serve  as  a 
guide  in  determining  prices,  in  eliminating  wastes,  and 
in  determining  what  may  best  be  undertaken;  for  one 
cannot  otherwise  easily  get  a  safe  guidance  in  these  par- 
ticulars. It  seems,  too,  as  if  it  is  the  function  of  the 
bookkeeper  to  record  the  results  of  such  study,  for  surely 
they  will  be  forgotten  if  they  are  not  recorded. 

Possibly  some  persons  admit  that  for  such  purposes 
as  those  just  discussed,  interest  must  be  considered,  but 
deny  that  it  is  a  cost.  Discussions  of  terminology  are 
quite  as  likely  to  be  fruitless  as  fruitful.  Any  practical 
value  that  they  may  have  must  lie  in  a  possible  better 
common  understanding  of  one  another's  meaning  when 
men  use  the  terms  in  question.  To-day  the  word  "profit," 
which  is  the  complement  of  "cost,"  is  used  in  many  senses. 
Under  many  partnership  agreements,  salaries  and  interest 
on  investment  are  charged  as  expenses,  and  net  profit  is 
the  gain  arising  from  proprietorship  pure  and  simple — 
from  the  circumstance  of  responsible  ozuncrship,  aside  from 
the  salary  of  the  manager  as  manager  (not  financially 
responsible)  and  from  the  income  of  the  capitalist  as 
capitalist  (not  personally  responsible).  The  happy  con- 
junction of  ownership  and  personal  responsibility  often 
results  in  a  gain  not  otherwise  realizable;  and  that  gain 
is  profit.     When  there  is  no  provision  for  interest  and 


INTEREST  IN  ITS  RELATION  TO  COST 


39 


salaries,  on  the  other  hand,  the  term  "profit"  is  com- 
monly applied  to  the  difference  between  the  gross  income 
and  the  charges  incurred  for  purchases  and  outsiders' 
(non-partners')  services;  so  that  the  profit  shown  is  a 
compound  of  return  for  proprietors'  services,  for  interest 
on  partners'  investments,  and  for  the  circumstance  of  re- 
sponsible ownership.  In  corporation  accounting,  again, 
salaries  are  always  included  in  expenses,  and  the  net  in- 
come is  the  return  to  the  stockholders  as  owners  of 
capital.  In  common  parlance,  therefore,  the  word 
"profits"  means  much  or  little.  Knowing  this,  men  al- 
ways interpret  it  with  a  mental  foot-note. 

On  the  announcement  of  the  figure  of  profits  under 
an  agreement  which  makes  no  provision  for  interest,  the 
first  mental  act  of  anyone  interested  in  the  business  is  to 
see  what  relation  those  profits  bear  to  the  capital — so  as 
to  see  what  are  the  excess  profits  over  a  reasonable  re- 
turn on  the  investment.  Instinctively,  interest  is  a  first 
deduction — partly  because  it  has  a  definite  basis  that  cart 
be  figured,  and  partly  because  it  is  the  one  thing  that 
everyone  counts  on.  One  does  not  think  of  terminology; 
one  thinks  only  of  the  fact.  Virtually  everyone  admits 
that  in  partnership  or  other  settlements  the  most  satis- 
factory agreement  is  one  that  provides  for  a  definite  in- 
terest charge.  This  is  mere  practical  convenience. 
Though  the  accountant  is  not  much  concerned  with  the- 
oretical economic  distinctions,  he  is  at  least  interested 
when  he  sees  that  economists  use  a  term  in  a  sense  that 
happens  to  be,  for  his  own  practical  purpose,  most  con- 
venient to  him.  Professor  F.  W.  Taussig,  in  his  "Princi- 
ples of  Economics,"*  a  recently  published  and  standard  au- 
thority used  in  many  universities,  says:  "So  much  only 
of  a  business  man's  income  is  to  be  regarded  as  profits 

Vol.  II,  p.  179. 


40 


COST   ACCOUNTING 


as    is    in    excess    of    interest    on    the    capital    which    he 
manages." 

We  have  seen  that  for  analytical  purposes,  in  study- 
ing operations,  practical  necessity  requires  us  at  least  to 
consider  interest  in  virtually  all  calculations  when  in- 
vestment is  involved;  and  we  have  seen  that  in  financial 
statements  practical  convenience  is  served  by  the  treat- 
ment of  interest  as  a  charge,  or  cost,  rather  than  as  a 
residue,  or  profit.  It  seems  reasonable,  therefore,  for  ac- 
countants to  adopt  a  terminology  that  will  serve  their 
own  ends,  will  agree  with  the  terminology  of  economists, 
and  will  mislead  no  one.  Business  men  are  likely  to  be 
misled  in  the  future,  as  they  have  been  in  the  past,  by 
statements  of  profit  which  assume  that  no  cost  is  involved 
in  the  use  of  capital. 

Interest  a  Profit — Not  a  Cost 

The  following  article,  entitled  "The  Fallacy  of  Includ- 
ing Interest  and  Rent  as  Part  of  Manufacturing  Cost,"*  by 
A.  Lowes  Dickinson,  C.P.A.,  presents  the  other  side  of  the 
question,  viz :  that  all  interest  is  fundamentally  a  profit  and 
not  a  cost. 

The  "fundamental  objection  to  treating  interest  and  rent 
(which,  except  in  so  far  as  it  includes  compensation  for 
services  rendered,  is  only  a  form  of  interest)  as  an  integral 
part  of  the  cost  of  manufacture  is  that  all  interest  is  in 
fact  profit.  The  practical  effects  of  this  objection  are  as 
follows : 

First,  that  from  an  accounting  standpoint  costs  are 
used  mainly  to  determine  the  valuation  of  inventories  of 
stocks  on  hand  and  that  to  include  interest  (that  is,  profit) 
in  such  costs  leads  to  inflation  of  these  values  and  conse- 
quent anticipation  of  profits  not  yet  earned  by  the  sale  of 
products. 

•"Journal    of   Accountancy,"  August,  1913. 


INTEREST  IN  ITS  RELATION  TO  COST 


41 


Secondly,  tliat  it  is  impracticable  to  determine  a  rate  of 
interest  on  any  but  an  arbitrary  basis  and  tbat  consequently 
costs  arrived  at  on  such  a  basis  have  no  real  meaning  and 
may  easily  be  misleading.  For  example — owners  of  a  busi- 
ness are  earning  profits  equivalent  to  12%  on  the  capital 
employed  and  decide  to  make  certain  extensions  and  im- 
provements which  will  result  in  savings  equivalent  to  10% 
on  their  cost ;  they  are  in  a  position  to  raise  the  money  by 
an  issue  of  bonds  on  a  5^%  basis  or  of  preferred  stock  on 
a  7%  basis.  What  rate  of  interest  should  be  added  as  a 
charge  to  cost  accounts  if  such  a  principle  is  adopted? 

Thirdly,  that  the  common  methods  of  including  interest 
in  costs  calculate  such  interest  only  on  buildings,  plant  and 
machinery  and  ignore  the  investment  of  working  capital, 
and  frequently  also  the  element  of  time  during  which  the 
capital  facilities  are  required  for  each  manufacturing 
operation. 

Fourthly,  that  to  include  interest  in  costs  of  every 
operation  results  in  concealing  from  those  in  charge  of  the 
business  the  exact  effect  of  two  of  the  important  factors 
involved  in  profits — namely,  the  amount  of  capital  em- 
ployed and  the  time  for  which  it  is  employed — and  conse- 
quently the  actual  return  on  the  investment  necessary  to 
produce  it  which  is  yielded  by  any  particular  article. 

Whilst  perhaps  the  point  is  not  material  in  a  discussion 
of  the  theory  involved,  it  may  be  pointed  out  that  there  is 
a  strong  objection  on  the  ground  of  policy  to  the  inclusion 
of  interest  as  a  part  of  the  cost,  particularly  in  the  case  of 
public  service  corporations.  In  fact,  this  objection  is  so 
pronounced  that  some  banks  stipulate  in  agreements  with 
borrowers  that  inventories  must  be  taken  upon  a  basis  that 
excludes  interest  on  capital  invested. 

If  any  interest  rate  is  to  be  assumed  it  can  only  be  a  rate 
which  represents  a  fair  compensation  for  the  use  of  the  capi- 


42  COST   ACCOUNTING 

tal.  If  the  selling  price  or  rate  yields  a  profit  over  and  above 
the  cost  of  material  and  labor,  a  fair  return  on  the  capital 
employed  and  fair  compensation  for  management,  it  would 
seem  that  to  the  extent  of  this  profit  the  price  charged  is 
excessive,  at  least  where  the  manufacture  is  not  conducted 
under  some  patent  or  other  special  process  for  which  a 
further  compensation  may  fairly  be  exacted.  This  is  not  a 
conclusion  that  a  manufacturing  or  public  service  corpora- 
tion whose  prices  or  rates  are  attacked  can  afford  to  admit, 
more  especially  as  those  attacking  the  rates  are  not  bound 
by  the  interest  rate  adopted,  as  the  corporation  might  be. 

While,  however,  so  far  as  the  general  accounts  of  a 
business  are  concerned,  it  must  be  held  that  interest  is  not  a 
proper  element  in  the  cost  of  product,  there  is  an  undoubted 
demand,  and  even  necessity,  for  some  supplementary  statis- 
tical accounting  which  will  give  effect  to  the  principal  ele- 
ments involved  in  the  earning  of  profits.  The  factors 
involved  in  profits  are  the  following : 

(i)  The  labor,  material  and  expense  cost  of  a 
unit  of  each  class  of  article. 

(2)  Facilities  used  in  manufacture,  such  as  land, 
buildings,  machinery,  tools,  stocks  on  hand,  and 
other  working  capital,  all  segregated  between  the 
different  classes  of  articles. 

(3)  The  time  during  which  such  facilities  are 
in  use  for  a  unit  of  each  class. 

(4)  The  selling  price  of  each  unit  of  each  class. 

If  these  elements  be  known,  comparisons  can  be  made 
between  different  articles  produced  in  the  same  factory  or 
between  the  same  articles  produced  in  different  factories,  as 
to  the  amount  of  fixed  capital  employed  in  different  pro- 
cesses and  the  time  for  which  it  is  employed;  as  to  the 


INTEREST  IN  ITS  RELATION  TO  COST      43 

amount  of  working  capital  constantly  maintained  and  used ; 
and  as  to  the  effect  of  further  expenditures  on  additions 
and  improvements  with  a  view  to  cheapening  cost  of  pro- 
duction. Only  the  first  of  the  above  four  factors  should 
enter  into  the  general  accounting  books  and  form  the  basis 
of  inventory  valuations  and  so  of  the  actual  profits  earned; 
the  remaining  factors  should  be  dealt  with  only  in  sub- 
sidiary statistical  records.  The  difference  between  the  sum 
of  all  selling  prices  (4)  and  of  all  costs  (i)  will  agree  with 
the  gross  profit  in  the  accounting  books ;  and  a  comparison 
of  this  figure  with  the  total  capital  employed,  including  not 
only  fixed  but  circulating  capital  necessary  for  manufactur- 
ing purposes,  w'ill  give  the  rate  of  return  yielded  by  all 
classes  of  articles.  The  cause  of  any  variation  in  this  rate- 
of  return,  as  compared  with  a  previous  period,  or  of  the 
varying  rates  of  return  on  different  articles  in  the  same 
factory,  or  of  the  same  articles  in  different  factories,  will  be 
obtained  from  the  detail  figures.  Such  variations  may  be 
due  either  to  (i)  higher  or  lower  cost  of  labor,  material 
and  expense;  (2)  greater  or  smaller  amount  of  facilities 
used;  (3)  longer  or  shorter  time  during  which  these  facili- 
ties are  used;  and  (4)  lower  or  higher  selling  price.  If 
interest  at  an  arbitrary  rate  is  included  throughout  in  labor, 
material  and  expense  costs  it  means  that  the  fluctuations  in 
profit  due  to  the  first  three  of  these  variations  are  merged 
into  one  and  cannot  without  considerable  labor  again  be 
segregated.  The  best  measure  of  factors  (2)  and  (3) 
would  seem  to  be  the  value  of  the  facilities  used,  multiplied 
by  the  fraction  of  the  year  during  which  they  were  used 
and  divided  by  100,  which  product  would  be  equivalent  to 
interest  at  i  %  per  annum ;  the  actual  margin  between  sell- 
ing price  and  cost  of  labor,  material  and  expense  divided 
by  this  product  w-ould  thus  be  the  actual  rate  of  return 
yielded  by  any  particular  class  of  articles,  the  average  of 


44 


COST   ACCOUNTING 


such  yields  corres]Joncling  to  the  yield  shown  by  the  prin- 
cipal accounting  records. 

Unused  facilities  would  under  this  system  appear  as  a 
factor  in  reducing  profits  either  by  lack  of  sufficient  busi- 
ness to  employ  them  or  by  excess  facilities  in  one  portion  of 
the  plant  as  compared  with  another.  The  product  factor 
corresponding  to  these  unused  facilities  would  form  part 
of  the  divisor  in  obtaining  the  average  yield. 

Comparative  costs  of  separate  operations  will  be 
reached  by  a  consideration  not  only  of  the  actual  labor, 
material  and  expense  cost  in  different  periods  or  in  separate 
factories,  but  also  by  a  comparison  of  these  costs  with  the 
facilities  employed.  Thus  the  estimated  savings  to  be 
efifected  in  any  operation  by  additional  expenditures  on  con- 
struction account  should  be  found  reflected  in  the  reduced 
cost  of  these  operations. 

Such  a  plan  as  that  here  suggested  gives  proper  weight 
to  all  the  factors  entering  into  profits,  without  introducing 
any  arbitrary  rate  of  interest;  it  will  be  no  more  com- 
plicated in  its  working  than  are  cost  systems  which  are 
in  constant  use;  and  its  complications  will  vary  with  the 
number  of  different  articles  produced  for  which  separate 
costs  are  required. 

Bibliography 

Discussions  of  interest  in  its  relation  to  cost  will  be 
found  in  the  following  publications  : 
"Factory  Accounts,"  Garcke  and  Fells,  page  140. 
"Commercial  Organization  of  Factories,"  Spencer,  page  150. 
"Factory  Costs,"  F.  E.  Webner,  pages  149  to  155. 
"Cost    Keeping   and    Management    Engineering,"    Gillette 

and  Dana,  pages  141  and  142. 
"Factory  Organization  and  Administration,"  Diemer,  page 

212. 


INTEREST   IN    ITS    RELATION    TO    COST  4^ 

"Cost  Accounts,"  Hawkins,  page  109. 

"Cost  Keeping  and  Scientific  Management,"  Evans,  page  37. 
I   "Depreciation  and  Wasting  Assets,"  Leake,  pages  53  and  54. 

Journal  of  Accountancy: 

December,  1911,  page  588,  A.  Lowes  Dickinson. 
April,    1913,  page  236,  A.  Hamilton  Church. 
April,   191 3,  page  240,  W.  B.   Richards. 
April,   1913,  page  241,  J.  E.   Sterrett. 
May,   191 3,  page  329,  Edward  L.  Suffern, 
May,   191 3,  page  330,  J.  Lee  Nicholson. 
May,   191 3,  page  334,  J.  Porter  Joplin. 
June,   1913,  page  427,  H.  C.  Miller. 
June,    19 1 3,  page  428,  John  R.  Wildman. 
June,   19 1 3,  page  431,  Herbert  M.  Temple. 
June,   19 1 3,  page  473,  E.  C.  Gough. 
July,   19 1 3,  page  22,  Arthur  Berridge. 
August,    191 3,   page    145,    Henry   A.    Denison    (Court 
Decision). 


CHAPTER  IV 

PRINCIPLES  AND  GENERAL  METHODS  OF  COST 
FINDING 

Calculating  Costs 

The  conditions  of  manufacture  determine  the  basis  on 
which  costs  are  calculated ;  and  according  to  these  condi- 
tions, costs  are  found  either  ( i )  on  the  order,  job  or  article, 
or  (2)  on  the  product  or  process,  without  relation  to  a  par- 
ticular order  or  article.  The  former  method  is  known  as 
the  "Special  Order  System,"  and  the  latter  as  the  "Product 
System." 

Applying  Cost  Charges 

There  are  two  general  methods  of  applying  the  items  of 
cost,  known  as 

(i)    Productive  labor  method   (hours  or  wages) 
(2)   Process  method 

In  the  first  method,  the  labor  and  material  are  charged 
directly  to  the  order,  article  or  product,  and  to  these 
charges  is  added  a  pro  rata  share  of  the  indirect  expenses, 
based  upon  the  amount  or  the  time  of  the  productive  labor 
consumed  in  the  production  of  that  order,  article  or 
product.     This  gives  the  total  cost. 

Under  the  second  method,  the  charges  are  made  against 
the  process  or  operation,  and  after  the  total  cost  is  ascer- 
tained it  is  distributed  over  the  product  according  to  its 
46 


TRINCIPLES    AND    GENERAL    METHODS  47 

nature — i.e.,  on  the  basis  of  weight,  measure  or  number,  as 
the  case  may  be. 

Machine  Cost  Method 

A  special  type  of  the  process  method,  particularly  valu- 
able when  it  can  be  used,  is  the  "Machine  Cost  Method," 
which  employs  the  same  principle,  but  applies  it  to  machines 
or  groups  of  machines.  Its  effectiveness  is  due  to  its  ability 
to  absorb  many  of  the  usual  indirect  expenses,  such  as 
power,  heat,  light,  etc.,  as  direct  charges,  thus  lessening  the 
amount  of  indirect  cost  that  must  be  distributed  over  the 
product  as  a  whole.  The  importance  of  this  must  not  be 
underestimated.  The  direct  material  and  labor  charges  are 
not.  as  a  rule,  difficult  to  compile  or  distribute,  and  can  be 
accurately  determined ;  but  the  proper  distribution  of  indi- 
rect expense  is  difficult ;  and  almost  all  the  trouble  and  mis- 
takes in  finding  costs  are  due  to  this  fact.  Any  method  that 
provides  for  transforming  a  large  part  of  these  indirect 
expenses  into  direct  charges  attacks  the  difficulty  at  its 
source. 

Types  of  Systems 

Four  types  of  systems  are  founded  on  this  double  classi- 
.  fication — i.e.,  the  special  order  system  and  the  product 
{system  as  bases  for  calculating  costs,  and  the  productive 

labor    method    and    process    method    for    applying    costs. 
■  These  typical  systems  may  be  designated  as  follows : 

1(1)   Special  order  system,  using  the  productive 
labor  method. 

(2)  Special    order    system,    using    process    or 
machine  cost  method. 

(3)  Product  system,  using  the  productive  labor 
method. 


48 


COST    ACCOUNTING 


(4)   Product  system,  using  process  or  machine 
cost  method. 

Cost  finding  for  most  phases  of  manufacturing  may  be 
efifectively  served  by  one  of  these  four  types;  but  in  actual 
practice  it  is  comm.on  to  utiHze  the  features  of  two  or  more 
of  them  in  finding  the  costs  in  different  parts  of  a  plant. 
Each  type  is  susceptible  of  more  or  less  modification  to  fit 
special  conditions,  while  still  retaining  its  general  charac- 
istics.  The  success  or  failure  of  a  cost  system  sometimes 
largely  depends  on  the  recognition  of  these  special  condi- 
tions, and  the  proper  adaptation  of  the  cost  system  or 
systems  to  meet  their  needs. 

Partial  or  incomplete  cost  systems  are  frequently  de- 
vised for  particular  purposes.  In  such  cases,  as  a  rule,  the 
object  is  to  find  the  cost  of  certain  lines  of  goods  as  a  class, 
without  going  into  details  for  each  production  order  or 
article.  A  partial  system  of  this  kind  is  described  in 
Chapter  XIII. 

There  are  also  in  use  systems  or  methods  of  estimating 
costs  and  of  verifying  these  estimates  to  a  certain  degree 
of  accuracy.  These  are  not  cost  systems  in  the  true  sense 
of  the  word,  as  they  do  not  provide  for  finding  actual  costs; 
but,  nevertheless,  they  may  be  of  considerable  practical 
value  in  small  shops.  In  larger  factories  they  often  serve 
to  indicate  where  accurate  cost  methods  should  be  installed. 
These  methods  are  described  under  the  head  of  "Estimating 
Cost  Systems"  in  Chapter  XII. 

Analysis  of  Operations 

Since  one  of  the  principal  functions  of  a  cost  system  is 
to  analyze  the  costs  into  their  component  parts,  it  follows 
t1iat  there  must  be  a  corresponding  analysis  of  the  manu- 
facturing operations.    This  is  accomplished  by  dividing  the 


PRINCIPLES    AND    GENERAL    METHODS  49 

factory  more  or  less  arbitrarily  into  operating  departments 
or  production  centers,  the  aim  being  to  limit  each  depart- 
ment, as  far  as  possible,  to  simple  and  uniform  operations. 

The  operating  department  plays  a  very  important  part 
in  making  up  and  arranging  the  cost  accounts.  It  furnishes 
a  center  about  which  various  expenses  may  be  grouped,  and 
from  which  the  indirect  expenses  may  be  distributed  over 
a  limited  field  with  a  greater  degree  of  accuracy.  A  dis- 
tinction must  be  maintained  between  direct  production  de- 
partments and  indirect  production  departments.  The  latter 
often  have  to  carry  their  share  of  general  operating  ex- 
penses until  the  cost  incurred  in  them  is  distributed  as  a 
burden  on  direct  production. 

The  following  list  gives  the  operating  departments  of  a 
plant  manufacturing  axles  and  springs: 

Direct  Production  Departments 

Foundry 

Forge 

Upsetter 

Drop  Forge 

Blacksmith 

Welding 

Turning 

Heavy  Axle 

Axle  Box 

Axle  Nut 

Threading 

Light  Axle  Finishing 

Commercial  Assembly 

Pleasure  Auto 

Pleasure  Auto  Assembly 

Auto  Parts 

Chassis  Assembly 


50  COST   ACCOUNTING 

Indirect  Production  Departments 

Plant 

Power 

Supervision  and  Inspection 

Engineering  and  Draughting 

Purchasing  and  Stores 

Time  and  Cost 

Pattern 

Axle  Tool 

Die  Sinking 

Auto  Parts  Tool 

Yard  and  Local  Transport 

Accounts  are  kept  for  each  department,  and  these 
should  show  the  cost  for  material  and  labor  and  the  indirect 
expense  involved  in  its  operations. 

Material  Costs 

The  cost  of  direct  material  is  a  matter  of  market  price 
at  the  time  of  purchase,  plus  the  freight  and  yard  charges 
when  these  are  included  in  the  cost.  Sometimes  the  raw 
material  is  purchased  in  bulk,  and  has  to  be  sorted  and  re- 
valued according  to  grade,  as  in  the  case  of  feathers,  to- 
bacco, or  wool  in  the  grease.  The  material  cost  must  then 
be  adjusted  over  the  various  grades,  so  as  to  equal  the 
original  price. 

Complications  sometimes  arise  in  the  treatment  of  scrap 
material  used  in  making  by-products.  The  custom  is  to 
determine  the  per  cent  of  the  original  material  so  used,  and 
consider  its  cost  as  the  material  cost  of  the  by-product,  this 
being  deducted  from  the  cost  of  the  primary  product.  If, 
however,  there  is  no  way  of  determining  the  percentage  of 
the  waste  used,  except  at  considerable  expense,  or  if  it 
varies  greatly  in  quantity  and  quality,  its  scrap  value  is 


PRINCIPLES    AND    GENERAL    iMETIIODS  51 

estimated ;  and  when  the  by-product  is  sold,  the  amount 
received  for  it  is  usually  entered  under  the  head  of  sundry 
income.  When  this  last  method  is  used  no  deduction  is 
made  from  the  material  cost  for  scrap  value. 

Labor  Costs 

The  direct  labor  cost  is  often  easier  to  determine  than 
the  direct  cost  of  material.  In  piece-work  it  is  given  di- 
rectly on  the  product  without  further  calculation,  unless  the 
several  costs  of  the  parts  are  to  be  added  to  find  the  cost  of 
the  whole.  In  time  methods  of  payment  it  is  only  necessary 
to  show  how  much  time  each  workman  has  put  on  the 
product,  and  the  value  of  that  time  in  wages  paid. 

There  are,  however,  in  a  few  lines  of  manufacturing, 
conditions  where  a  workman  may  spend  only  from  three  to 
five  minutes  on  a  single  order  or  article.  In  such  cases  it  is 
not  practicable  to  charge  this  direct  labor  specifically  to  the 
individual  order  or  article,  and  a  plan  must  be  arranged  for 
its  distribution  over  the  number  of  articles  worked  on  dur- 
ing a  given  time.  In  other  words,  the  principle  of  the 
process  plan  must  be  used  for  this  particular  class  of  labor. 

In  such  cases  an  estimate  of  the  cost  involved  in  an 
operation  or  process  is  quite  often  made,  based  on  previous 
experience  or  tests ;  and  these  figures  are  then  used  as  a  basis 
for  applying  the  direct  costs.  If  the  conditions  remain 
exactly  the  same,  the  results  may  be  fairly  accurate. 

Distribution  of  Indirect  Expenses 

The  ideal  cost  system  would  make  all  indirect  expense 
apply  to  the  related  product  in  the  same  way  as  the  direct 
costs.  This,  however,  is  hardly  ever  possible.  The  prac- 
tical or  working  ideal  is  to  assign  as  many  of  the  indirect 
expenses  as  possible  directly  to  the  product  to  which  they 
relate,  and  so  reduce  the  general  indirect  expenses  to  a 


r2  COST    ACCOUNTING 

minimum.  There  is  a  close  relation  between  the  amount  of 
unassigned  or  general  indirect  expense  and  the  accuracy  of 
the  costs  obtained. 

The  machine  cost  method  was  commended  specifically 
on  this  ground,*  its  principle  being  to  gather  all  the  ex- 
penses possible  "at  the  point  of  the  tool,"  where  they  are 
easily  applied  to  the  product  operated  on.  The  value  of  the 
operating  department  as  a  similar  agent  has  also  been 
pointed  out,  the  idea  there  being  to  gather  such  indi- 
rect expenses  as  pertained  to  any  department,  and  dis- 
tribute them  over  its  own  particular  output. 

However,  when  the  best  has  been  done,  there  is  neces- 
sarily a  residue  of  expense  that  cannot  be  conceived  of  as 
applying  to  any  particular  part  of  production.  This  is 
sometimes  distributed  over  the  product  as  a  whole,  but  the 
best  method  is  to  distribute  it  first  over  the  departments  as 
units,  and  then  to  have  each  department  distribute  its  share 
in  its  own  way. 

The  method  frequently  followed,  of  distributing  the  in- 
direct expense  over  the  whole  production  by  adding  a  cer- 
tain percentage  to  the  prime  cost,  implies  the  fixing  of  an 
accurate  rate,  and  is  subject  to  very  grave  criticism  unless 
the  output  of  the  factory  is  unusually  uniform  both  as  to 
nature  and  quantity.  Ordinarily  the  indirect  expense  is  not 
the  same  for  each  class  of  article,  as  each  involves  differ- 
ences in  process  peculiar  to  itself;  and  this  throws  the 
method  out  of  adjustment.  The  fault  is  very  marked  when 
certain  articles  pass  through  only  a  few  departments,  Avhile 
others  have  to  go  through  the  whole,  or  nearly  the  whole, 
routine.  The  former  then  have  to  help  bear  the  indirect 
expenses  of  several  departments  in  which  they  have  never 
been  at  all,  while  the  latter  are  relieved  of  a  burden  that 
properly  applies  to  them.     A  manufacturer  may  easily  be 

•Page  47. 


J 


PRINCIPLES   AND   GENERAL    METHODS  53 

led  into  fatal  errors  of  policy  by  depending  upon  costs  so 
obtained. 

Even  at  its  best,  this  percentage  plan  does  not  provide 
for  an  analysis  of  costs;  and  the  organization  and  efficiency 
value  of  more  accurate  expense  distribution  is  given  up 
entirely  for  the  sake  of  simplicity.  It  must  be  remembered 
that  each  department  has  its  own  equipment,  and  possibly 
differs  from  the  other  departments  in  capital  invested,  floor 
space,  power  used,  etc.  Therefore,  any  method  which  does 
not  utilize  this  natural  center  for  collecting  and  dis- 
tributing expenses,  fails  to  use  its  most  efficient  weapon. 

Supposing  the  departmental  method  to  have  been 
adopted,  there  still  remains  the  most  vexatious  problem 
of  all — upon  what  basis  shall  the  indirect  expenses  be 
distributed  within  the  department  so  as  to  charge  each 
order  or  article  with  the  portion  that  properly  belongs  to 
it?  To  illustrate,  let  us  suppose  that  high-priced  and  low- 
priced  men  work  side  by  side,  or  that  there  are  machines 
of  very  different  size  and  value  operated  by  men  who 
draw  the  same  wages,  or  that  the  operations  involve  about 
equal  parts  of  machine  work  and  work  by  hand — all  of 
which  are  quite  ordinary  conditions.  Shall  the  basis  of 
expense  distribution  be  the  cost  of  labor  or  the  time  spent 
on  the  work?  Does  the  cost  of  material  enter  in  as  a 
factor?  Is  a  machine  rate  possible  or  practical?  If  so, 
just  what  ground  can  it  cover?  These  are  some  of  the 
questions  which  must  be  answ-ered,  and  answered  cor- 
rectly, if  the  cost  results  are  to  be  accurate. 

No  one  method  of  distributing  indirect  expense  can 
be  considered  as  orthodox  for  all  cases.  Everything  de- 
pends on  the  particular  existing  conditions.  The  purpose 
here  is  to  describe  the  standard  methods,  stating  their 
underlying  principles,  and  indicating  the  conditions  where 
each  is  effective. 


CHAPTER  V 

METHODS    OF   DISTRIBUTING   INDIRECT 
EXPENSES 

There  are  seven  methods  of  distributing  indirect  ex- 
penses which  may  be  considered  as  more  or  less  standard. 
A  study  of  methods  found  elsewhere  under  other  names 
will  show  that  they  are  more  or  less  modifications  or 
combinations  of  these  seven.  It  is  suggested  that  under 
some  circumstances  one  of  these  methods  may  be  found 
valuable  to  distribute  the  general  operating  expenses  over 
the  departments,  while  another  method  may  be  used  more 
advantageously  in  the  department  itself  to  apply  the  ex- 
pense to  the  product. 

The  methods  are: 

(i)  Direct  Labor  Cost 

(2)  Direct  Labor  Hours 

(3)  Direct  Labor  and  Material  Cost 

(4)  New  Pay  Rate 

(5)  Old  Machine  Rate 

(6)  New  Machine  Rate 

(7)  Fixed  Machine  Rate 

(i)  Direct  Labor  Cost 

This  method  is  based  on  the  principle  that  indirect 
expenses  are  incurred  in  proportion  to  the  amount  of 
labor  involved,  this  amount  being  measured  by  the  labor 
cost. 

54 


DISTRIBUTING    INDIRECT    EXPENSES 


55 


To  operate  the  plan,  the  total  cost  of  direct  labor 
charged  to  the  product  for  a  definite  period  is  ascer- 
tained, together  with  the  total  indirect  expenses  for  the 
same  period.  The  total  indirect  expense  is  divided  by  the 
total  labor  cost;  and  this  shows  what  per  cent  the  indirect 
expense  is  of  the  total  productive  labor.  The  amount 
of  indirect  expense  assigned  to  any  article  is  then  found 
by  multiplying  the  labor  cost  of  the  article  by  the  rate. 
Adding  the  amount  of  the  indirect  expenses  to  the  prime 
cost  gives  the  total  or  factory  cost.  The  same  principle 
applies  in  finding  the  factory  cost  of  any  job,  production 
order,  or  process. 

To  illustrate,  suppose  that  the  pay-rolls  for  a  certain 
cost  period  show  payments  of  $16,000  for  direct  labor, 
and  that  the  indirect  expenses  for  the  same  period  are 
$14,000.  These  indirect  expenses  are  87^  per  cent  of 
the  direct  labor  cost.  Now,  if  a  man  worked  on  an  article 
5  hours  at  32  cents  an  hour,  and  the  cost  of  material  was 
60  cents,  the  total  cost  would  be  $0.60,  plus  $1.60,  plus 
87 /^  per  cent  of  $1.60,  or  $3.60. 

The  simplicity  of  this  method  is  a  great  point  in  its 
favor,  but  at  the  same  time  offers  a  temptation  to  em- 
ploy the  method  too  widely.  The  point  to  consider  is 
how  far  the  particular  conditions  are  in  accord  with  the 
principle  of  the  method.  To  fit  the  case  perfectly,  the 
labor  should  be  the  dominant  element  in  the  manufac- 
turing process,  and  there  should  be  a  marked  uniformity 
as  to  product,  wages,  and  time  of  operation.  These  con- 
ditions rarely  exist  throughout  a  factory,  but  are  not  un- 
common in  single  departments.  The  limits  within  which 
the  method  may  be  advantageously  applied  are  therefore 
fairly  well  defined. 

When  the  direct  labor  method  is  employed,  special 
care  must  be  exercised,  if  there  are  machines,  to  see  that 


56 


COST   ACCOUNTING 


they  are  uniform  as  to  cost  and  running  expenses,  or,  if 
not,  that  there  is  a  corresponding  difference  between  the 
wages  paid  to  the  operators.  The  method  is  less  accurate, 
and  even  misleading,  if  these  uniformities  do  not  exist. 
For  instance,  if  a  low-priced  man  is  operating  an  ex- 
pensive automatic  machine,  and  a  high-priced  man  is 
working  at  a  cheap  machine  where  skill  amounts  to  more 
than  running  expense,  the  charges  for  indirect  expense 
will  not  only  be  inaccurate,  but  will  be  actually  reversed. 

When  the  residue  of  unabsorbed  general  operating  ex- 
penses is  small,  the  direct  labor  method  is  often  used  to 
prorate  it  over  the  departments,  first,  because  the  data 
on  which  to  base  the  distribution  are  easily  obtained,  and 
second,  because  any  resulting  errors,  when  divided  up 
over  all  the  output  of  all  the  departments,  will  hardly 
be  appreciable.  Only  an  examination  of  the  circumstances 
in  the  case  can  determine  whether  theoretical  accuracy 
may  be  safely  put  aside  for  the  sake  of  practical  results. 

(2)  Direct  Labor  Hours 

The  principle  of  this  method  is  the  same  as  that  just 
described,  except  that  the  amount  of  labor  is  measured 
by  time  and  not  cost.  That  is  to  say,  the  indirect  ex- 
penses of  a  plant  are  considered  to  be  in  keeping  with  the 
number  of  employees  engaged,  and  the  hours  they  work, 
rather  than  with  the  wages  they  receive. 

The  plan  is  to  divide  the  total  indirect  expense  for  some 
definite  period  by  the  number  of  productive  labor  hours 
in  that  same  period,  in  order  to  find  the  amount  per  hour 
to  be  added  to  the  prime  cost  of  the  product.  Using  the 
example  given  before,  suppose  the  number  of  working 
hours  for  direct  labor  to  be  56.000,  and  the  indirect  ex- 
pense to  be  $14,000  as  before.  $14,000  divided  by  56,000 
gives  an  indirect  expense  per  hour  of  25  cents.     In  pro- 


DISTRIBUTING    INDIRECT    EXPENSES  57 

ducing  the  single  article  previously  discussed,  the  other 
conditions  remaining  the  same,  the  total  would  be  60 
cents  for  material,  plus  $1.60  for  labor,  plus  5x25  cents 
for  overhead,  equaling  $3.45. 

An  analysis  of  the  difference  between  the  two  costs 
will  provide  the  best  basis  of  comparison  between  the 
methods.  The  critical  point  is  the  32  cents  per  hour  of 
the  labor  cost  in  the  first  example.  The  average  wage  per 
hour  found  by  dividing  $16,000  by  56,000  is  only  28  4-7 
cents  per  hour,  and  therefore  the  output  of  any  man 
whose  pay  is  more  than  28  4-7  cents  per  hour  has  to  bear 
more  of  the  indirect  expense  in  the  first  method  than  in 
the  second. 

This  makes  it  perfectly  clear  why  ''there  should  be  a 
marked  uniformity  as  to  product,  wages,  and  time  of 
operation"  in  the  direct  labor  cost  method.  Evidently, 
differences  in  any  of  these  factors  tend  to  throw  the 
costs  out  of  true,  unless  it  can  be  shown  that  there  are 
corresponding  differences  in  the  direct  costs.  And  this 
has  to  be  shown  in  each  particular  case;  for  there  is  no 
essential  reason  why,  as  between  two  men  working  side 
by  side,  the  output  of  the  higher-priced  man  should  incur 
more  indirect  expense  than  the  other.  Consideration 
will  show  that,  on  the  whole,  indirect  expense  is  more  a 
function  of  time  than  of  labor  cost.  If  the  items  that 
make  up  indirect  expense  are  examined  one  by  one,  as 
interest,  depreciation,  light,  heat,  power,  supervision,  etc., 
it  must  be  seen  at  once  that  the  majority,  though  not  all 
of  them,  accumulate  according  to  time,  and  have  but  an 
incidental  connection  with  the  rate  of  wages. 

The  conclusion  is  clear  that,  other  conditions  being 
equal,  the  labor  hour  method  is  applicable  to  a  wider 
field  than  the  labor  cost  method.  Certain  limitations  re- 
main, viz.:    The  labor  should  be  a  dominant  factor,  and, 


58  COST   ACCOUNTING 

for  the  most  part,  the  product  should  be  uniform.  Where 
machines  are  used,  the  same  precautions  must  be  taken  as 
in  the  case  of  direct  labor  cost,  except  that  the  wages  of 
the  operators  may  be  disregarded. 

(3)  Direct  Labor  and  Material  Cost 

Under  this  method  of  expense  distribution,  the  cost 
of  material  is  recognized  as  one  of  the  factors  that  give 
rise  to  indirect  expense.  The  principle  and  plan  of 
operation  are  exactly  the  same  as  described  in  the  direct 
labor  cost  method,  if  "prime  cost"  is  substituted  for  "direct 
labor  cost." 

The  limitations  described  there  all  apply  in  this  case, 
with  the  additional  condition  that  the  material  cost  and 
labor  cost  should  be  nearly  equal.  This  method  is  seldom 
found  in  practice,  and  then  almost  always  as  an  averaging 
method,  to  prorate  the  general  expenses  over  the  whole 
product.  In  such  cases  it  must  meet  the  objection  to 
that  class  of  methods  as  a  whole. 

If  the  method  is  used  out  of  its  special  field,  where 
the  necessary  uniform  conditions  do  not  exist,  the  re- 
sults are  quite  unreliable. 

(4)  New  Pay  Rate 

The  "New  Pay  Rate"  is  still  another  way  of  utilizing 
the  principle  of  direct  labor  cost  in  expense  distribution. 
It  is  essentially  a  departmental  method,  and  is  rarely  used 
for  any  other  purpose. 

Under  this  plan  the  indirect  expenses  connected  with 
any  operating  department  are  first  determined;  and  to 
these  is  added  the  department's  share  of  the  general 
operating  expenses,  which  is  determined  on  any  basis 
that  seems  best.  Next,  the  percentage  of  expense  to 
labor  cost  is  determined  as  in  the  first  method;  but,  in- 


DISTRIBUTING    INDIRECT    EXPENSES 


59 


stead  of  this  rate  being-  added  to  the  total  labor  cost,  it 
is  applied  to  the  employee's  wage  per  hour.  For  instance, 
if  the  indirect  expenses  were  621^  per  cent  of  the  direct 
lal)or  cost,  and  a  workman's  pay  was  32  cents  per  hour, 
the  new  pay  rate  as  applied  to  the  product  would  be  32 
cents  plus  62^  per  cent  of  32  cents,  or  52  cents  per  hour. 
If  the  man  worked  five  hours  on  any  one  article,  that 
article  would  be  charged  with  five  times  52  cents,  or 
$2.60  for  labor  and  indirect  expense.  By  adding  the 
material  cost  to  this,  the  total  cost  is  shown. 

The  principle  involved,  and  the  conditions  of  its  appli- 
cation, have  already  been  sufficiently  discussed  under  the 
direct  labor  cost  method.  The  only  advantage  of  the 
new  pay  rate  lies  in  the  ease  with  which  the  expenses 
are  prorated  over  the  product.  Once  the  rate  is  deter- 
mined, it  is  a  very  simple  matter  to  apply  it  to  every 
article  or  order. 

For  finding  costs  it  is  just  as  accurate  as  the  direct 
labor  cost  method  and  no  more;  but  as  a  method  it  fails 
to  present  the  data  necessary  to  analyze  costs  properly. 
It  collects  charges  in  totals;  and,  in  order  to  attain  sim- 
plicity, neglects  the  proper  classification  and  arrangement. 
However  practical  it  may  be  in  some  cases,  this  last  con- 
sideration disqualifies  it  as  a  part  of  any  complete  cost 
system. 

(5)  Old  Machine  Rate 

All  machine  rates  are  based  on  the  principle  that  in- 
direct expenses  accrue  according  to  the  number  of  hours 
machines  are  in  operation.  There  is  considerable  difference 
in  the  methods  employed  by  the  different  forms  of  machine 
rate  in  collecting  and  applying  the  charges  to  the  product. 
The  simplest  is  the  "Old  Machine  Rate." 

Under  this  method,  the  amount  of  indirect  expense 


6o  COST   ACCOUNTING 

for  a  certain  period  is  divided  by  the  number  of  hours  the 
machines  have  been  in  operation  during  that  period,  and 
the  rate  per  hour  is  appHed  to  the  product,  according  to 
the  number  of  hours  it  has  been  in  process,  as  its  share 
of  the  overhead.  In  common  with  all  other  general 
methods,  it  will  produce  accurate  results  only  when  the 
conditions  are  substantially  uniform.  The  machines 
should  be  alike  as  to  cost,  power,  floor  space,  etc.;  and 
this  practically  limits  its  scope  to  departmental  dis- 
tribution. When  such  conditions  exist  in  a  department, 
the  old  machine  rate  is  both  convenient  and  accurate,  and 
will  naturally  be  selected  in  preference  to  more  com- 
plicated methods. 

In  departments  where  bench  work  is  combined  with 
machine  work  the  method  breaks  down,  because  it  makes 
no  provision  for  anything  outside  of  machine-made 
products.  For  the  same  reason  it  is  almost  never  suit- 
able for  distributing  general  operating  expenses. 

(6)  New  Machine  Rate 

The  "New  Machine  Rate"  represents  the  modern  ap- 
plication of  the  machine  rate  principle  to  complex  con- 
ditions. It  connects  or  welds  three  principles  or  ideas 
into  one  working  system. 

(i)  It  employs  the  machine  rate  principle,  as 
stated. 

(2)  It  recognizes  and  provides  for  the  differ- 
ences in  indirect  expenses  that  arise  from  differ- 
ent kinds  of  machines. 

(3)  It  is  specifically  devised  to  absorb,  as  direct 
charges,  all  the  indirect  expenses  that  can  be  asso- 
ciated directly  or  indirectly  with  the  operation  of 
any  machine  or  process. 


DISTRIBUTING    INDIRECT    EXPENSES  6l 

In  installing  the  new  machine  rate,  the  department 
is  taken  as  the  unit  whenever  possible;  but  if  a  depart- 
ment includes  different  machines  or  processes,  a  further 
subdivision  of  charges  must  be  made  inside  the  depart- 
ment itself.  The  essential  point  is  to  reduce  the  unit  to 
processes  of  the  same  kind,  or  to  the  machines  used  in 
such  processes,  even  if  this  carries  it  down  to  the  single 
machine. 

The  object  in  view  is  to  collect  the  various  charges 
against  each  machine  or  process  in  such  a  way  as  to  know 
what  it  actually  costs  to  run  the  machine  per  hour;  i.  e., 
what  the  hourly  machine  rate  is  when  the  operations  or 
processes  have  been  classified,  and  the  charges  have  been 
made,  each  item  being  considered  by  itself.  In  making 
up  the  charge  per  hour  only  the  actual  number  of  opera- 
ting hours  for  the  cost  period  is  considered. 

In  making  up  the  machine  rate,  the  labor  cost  is  ob- 
tained from  the  time  reports,  as  is  also  the  actual  number 
of  operating  hours. 

Circumstances  must  determine  whether  the  material 
cost  should  enter  into  the  machine  rate  or  not.  If  the 
materials  operated  on  vary  in  grade  or  price,  the  rate  is 
made  up  of  the  other  expenses,  and  the  material  cost  not 
included  until  after  the  process  cost  for  each  article  or 
order  is  calculated. 

The  depreciation  per  hour  is  found  by  dividing  the 
cost  of  the  machine  by  the  total  estimated  number  of 
working  hours  in  the  life  of  the  machine. 

Most  of  the  floor  space  charges,  and  those  resting 
on  the  value  of  the  machine,  as  interest,  insurance,  etc., 
are  steady,  or  annual,  charges,  and  accumulate  whether 
the  machine  is  idle  or  not.  These  charges  for  the  cost 
period  are  made  a  part  of  the  machine  rate  by  being 
divided  by  the  number  of  actual  working  hours.     If  there 


62  COST    ACCOUNTING 

is  very  much  idle  time  on  the  part  of  a  single  machine,  it 
may  be  best  to  make  the  annual  charges  for  such  machine 
a  part  of  the  department  indirect,  and  so  spread  the  cost 
over  the  department,  instead  of  centering  it  on  the  small 
amount  of  product  actually  going  through  the  machine. 

Power  charges  must  be  determined  by  taking  an  in- 
dication of  power.  Allowance  for  horse-power  lost  in 
transmission  may  be  made  if  there  are  marked  inequali- 
ties, or  if  great  exactness  is  desired.  If  no  such  allowance 
is  called  for,  the  first  step  in  determining  power  charges  is 
to  calculate  the  total  horse-power  hours  of  all  machines  as 
actually  operated.  Multiplying  the  horse-power  of  a  machine 
by  the  number  of  hours  the  machine  is  operated  gives  the 
horse-power  hours  for  that  machine;  and  the  total  for  the 
plant  is  found  by  adding  the  results  for  each  machine.  The 
power  generated  at  the  engine  but  not  indicated  in  the 
above  total  is  simply  considered  as  unutilized  power,  the 
cost  of  which  is  borne  pro  rata  by  all  the  machines.  The 
total  power  charge  of  the  power  department  of  the  plant 
is  then  divided  by  the  total  horse-power  hours,  which  gives 
the  cost  of  power  per  horse-power  hour.  Multiplying  this 
by  the  horse-power  hours  of  each  machine  gives  the  machine 
power  cost  per  hour  for  actual  operating  time. 

After  all  the  charges  possible  have  been  made  directly, 
the  residue  of  indirect  expenses  must  be  considered.  There 
are  two  classes  of  these — expenses  that  can  be  identified 
with  certain  departments,  and  general  operating  expenses 
for  the  plant  as  a  whole. 

First,  the  general  operating  expenses  are  distributed 
over  the  departments.  Second,  each  department  adds  to 
this  share  of  the  general  expense  its  own  departmental 
indirect  expense,  and  proceeds  to  distribute  the  total  over 
its  own  product,  the  method  depending  on  the  basis  of 
the  cost  system. 


DISTRIBUTING    INDIRECT    EXPENSES  63 

If  the  departmental  costs  are  based  on  a  unit  of  meas- 
ure, as  the  ton  or  gallon,  the  total  indirect  expense  of 
the  department  is  divided  by  the  total  output,  giving  the 
rate  per  unit,  and  the  rate  so  obtained  is  distributed 
among  the  machines  or  processes  by  multiplying  the 
number  of  units  of  product  operated  on  by  the  rate  per 
unit. 

If  the  costs  are  based  on  time,  the  departmental  ex- 
pense is  divided  by  the  total  number  of  machine-operating 
hours;  and  this  rate  is  added  to  the  direct  rate  already 
established,  which  gives  the  complete  or  final  rate  per 
hour  with  which  to  charge  the  product  of  that  depart- 
ment. 

In  special  cases,  the  department  indirect  may  be  dis- 
tributed over  the  machines  or  processes  on  the  basis  of 
labor  cost  or  labor  hours,  the  justification  lying  in  the 
circumstances. 

It  may  be  well  now  to  review  the  method  as  outlined. 

(i)  All  expenses  which  can  possibly  be  charged 
direct  to  machines  or  processes  are  so  charged. 

(2)  The  general  operating  expenses  are  dis- 
tributed over  the  departments  as  units,  and  be- 
come a  part  of  the  several  departmental  indirect 
expenses. 

(3)  The  total  departmental  indirect  expenses 
are  distributed  over  the  machines  or  processes  of 
the  department. 

(4)  Combining  the  charges  of  i  and  3,  the  total 
machine  rate  is  determined. 

Suppose  an  article  now  to  pass  through  several  de- 
partments or  processes.  Multiply  the  number  of  hours 
it  is  operated  on  in  each  process  by  the  machine  rate  for 


64 


COST   ACCOUNTING 


that  process,  and  the  cost  of  the  various  processes  so 
calculated  will,  when  added  together,  give  the  total 
process  cost. 

If  the  material  cost  constitutes  a  part  of  the  machine 
rate,  this  result  is  also  the  final  factory  cost;  if  not,  the 
material  cost  must  be  added  to  the  process  cost  to  get 
the  final  result. 

The  scope  of  the  new  machine  rate  method  should  be 
clear  from  the  foregoing  description.  It  can  be  used  when 
all  operations  are  performed  by  machines,  but  it  cannot 
be  applied  to  general  bench  work  and  miscellaneous  forms 
of  hand  labor. 

(7)  Fixed  Machine  Rate  M 

The  "Fixed  Machine  Rate"  is  characterized  by  three 
special  features: 

(i)  The  rate  itself  is  an  estimate,  and  is  made 
in  advance. 

(2)  The  rate  is  estimated  on  the  basis  that 
every  machine  in  the  shop  will  run  full  time. 

(3)  All  charges  unabsorbed  by  the  estimated 
fixed  rate  are  distributed  through  a  supplementary 
rate,  the  special  feature  in  this  being  its  relation  to 
idle  time. 

In  practice,  the  fixed  machine  rate  is  employed  in  vari- 
ous forms,  and  with  sometimes  quite  essential  differences. 
For  instance,  it  is  sometimes  used  departmentally,  and 
sometimes  it  covers  the  whole  machine  production  of  a 
plant,  each  machine  having  its  own  rate,  and  there  being 
no  class  of  expenses  recognized  as  departmental.  Again, 
the  rate  may  be  considered  as  a  single  rate  covering  all 
forms  of  expense,  or  it  may  be  constructed  as  a  total 


DISTRIBUTING    INDIRECT    EXPENSES  65 

rate  composed  of  component  rates,  each  rate  representing 
the  estimate  for  a  certain  class  of  expenses.  The  par- 
ticular method  chosen,  in  conjunction  with  the  conditions 
of  manufacture,  will  affect  the  accuracy  of  the  results  to 
a  considerable  degree. 

We  will  first  consider  it  as  a  single  rate.  The  esti- 
mate is  made  either  by  a  careful  analysis  of  all  the  ele- 
ments of  expense,  or  by  referring  to  the  results  of  past 
experience.  In  the  latter  case  the  average  results  of  a 
period  of  years  are  generally  taken.  In  either  case  it  is 
supposed  to  include  all  production  expenses  incident  to 
the  operation  of  each  machine. 

The  total  expense  assigned  to  each  machine  is  then 
divided  by  the  maximum  number  of  operating  hours  for 
any  chosen  period  to  find  the  machine  rate  per  hour;  i.  e., 
the  estimated  cost  of  running  the  machine  one  hour.  This 
rate  is  then  charged  against  the  machine,  irrespective  of 
the  actual  cost  per  hour,  or  the  actual  time  of  operation. 

The  sum  of  all  the  rates  or  machine  charges  in  any 
department  is  charged  against  that  department  in  the  de- 
partmental expense  account,  or,  if  no  departments  are 
considered,  the  total  of  all  estimates  is  charged  against 
a  general  factory  expense  account.  Whatever  difference 
appears  between  the  estimated  charges  and  the  actual  ex- 
penses for  the  period  is  adjusted  over  the  factory  through 
a  supplementary  rate,  which  may  be  applied  department- 
ally  or  over  each  machine  separately. 

If  all  the  machines  run  full  time,  it  is  obvious  that  all 
the  charges  as  estimated  will  be  absorbed  into  the  product; 
but  this  is  very  rarely  the  case.  Besides  the  idleness  due 
to  dull  times,  there  are  often  machines  that,  because  of 
great  capacity  or  peculiar  product,  are  used  only  a  frac- 
tion of  the  whole  time.  The  question  arises  as  to  what 
to  do  with   the  charges  written  against  a  machine  for 


ee  COST    ACCOUNTING 

the  time  that  it  is  idle,  which  seem  to  apply  to  nothing. 
If  they  are  added  to  the  cost  of  the  product,  they  in- 
crease it  out  of  all  proportion.  For  example,  if  a  ma- 
chine were  busy  only  one  day  in  a  week,  the  product  made 
that  day  would,  under  such  a  rule,  have  to  bear  the  ex- 
penses of  the  whole  week,  including  charges  that  do  not 
apply  to  it  in  any  possible  way.  The  result  would  be  in- 
accurate on  the  face  of  it. 

To  avoid  such  an  evident  fallacy,  the  costs,  as  deter- 
mined by  applying  the  rate  to  actual  running  time,  are 
subtracted  from  the  estimated  cost  to  find  the  amount 
still  unabsorbed.  This  is  considered  as  an  indirect  ex- 
pense estimated  but  not  actually  incurred,  so  it  is  sub- 
tracted from  the  departmental,  or  from  the  general  factory 
expense  account,  as  the  case  may  be,  in  order  to  make  the 
proper  adjustment. 

This  principle  in  itself  is  wrong.  The  plan  of  deduct- 
ing the  rate  of  idle  machines  from  the  general  expenses 
implies  that  there  are  no  direct  expenses  connected  with 
the  machines  when  they  are  not  working.  But  this  is 
not  true;  for  interest,  insurance,  floor  space  charges,  and 
certain  other  items  go  on  just  the  same. 

Evidently,  the  fixed  rate  will  be  unsatisfactory  unless 
provision  is  made  for  the  fixed  or  annual  charges  that 
accrue  whether  the  machines  are  idle  or  not;  and  these 
charges  must  be  distinguished  from  the  charges  arising 
out  of  actual  operation,  which  may  be  designated  as 
operating  charges.  Of  course,  allowances  may  be  made 
afterwards  by  adjusting  the  supplementary  rate,  but  this 
would  be  a  direct  contradiction  to  the  principles  and  pur- 
poses of  the  method  itself. 

To  avoid  these  difficulties,  separate  fixed  rates  may 
be  calculated  for  the  dififerent  classes  of  expense,  and  the 
total  of  these  rates  regarded  as  the  maximum  rate  for 


DISTRIBUTING    INDIRECT    EXPENSES  67 

operating  time.  For  instance,  one  rate  may  stand  for 
the  operating  charges  only,  while  another  may  represent 
the  annual  charges  assignable  to  any  particular  machine 
or  department.  A  third  rate  could  be  fixed  to  include  a 
pro  rata  share  of  the  estimated  general  operating  ex- 
penses. If  it  is  desired  to  analyze  the  expenses  accord- 
ing to  rates,  the  total  rate  could  be  divided  into  as  many 
component  rates  as  desired. 

Allowances  for  idle  time  would  now  be  made  as  fol- 
lows: The  maximum  number  of  operating  hours  is  multi- 
plied by  the  total  rate  for  each  machine,  which  gives  the 
total  amount  charged  against  that  machine.  The  sum 
of  all  these  charges  constitutes  the  total  estimated  fac- 
tory charge.  The  number  of  idle  hours  for  each  machine 
is  then  multiplied  by  the  "operating  expense  rate"  only, 
which  represents  the  expense  charged  against  the  ma- 
chine but  not  actually  incurred.  When  the  sum  of  all 
allowances  for  idle  time  is  subtracted  from  the  total  esti- 
mated factory  charge,  the  result  is  the  net  estimate  of  all 
charges.  The  difference  between  the  net  estimate  and  the 
actual  expense  is  then  adjusted  through  the  supplemen- 
tary rate. 

In  such  case  the  supplementary  rate  becomes  far  more 
important,  because  it  is  no  longer  limited  only  to  ad- 
justing mistakes  in  the  estimates,  but  also  becomes  the 
indicator  of  idleness  in  the  factory,  and  provides  the 
means  for  distributing  the  resulting  burden  over  the  whole 
product  manufactured.  The  supplementary  rate,  which 
distributes  these  expenses,  reflects  in  actual  figures  the 
fact  that  idleness  in  one  part  of  a  plant  is  a  burden  on  the 
rest  of  it. 

The  "Fixed  Rate"  as  a  method  is  adapted  only  to 
shops  where  the  greater  part  of  the  work  is  done  by  ma- 
chines.    The  drawbacks  are  that  it  is  primarily  an  esti- 


68  COST   ACCOUNTING 

mate  at  best,  and  that  it  is  too  rigid  to  reflect  all  the 
fluctuating  phases  of  actual  production. 

Miscellaneous  Methods 

Various  modifications  and  combinations  of  methods 
for  the  distribution  of  expense  have  been  devised  to  meet 
special  conditions  in  different  lines  of  business.  For  the 
most  part  they  are  "percentage"  plans  in  some  form  or 
other.  It  has  been  shown  that  accurate  costs  cannot  be 
obtained  from  an  arbitrary  percentage  added  to  the  prime 
cost  of  the  product,  except  in  the  most  elementary  con- 
ditions, M^here  there  is  only  one  class  of  product,  and  all 
processes  are  the  same.  This,  however,  does  not  for- 
bid the  application  of  a  percentage  to  the  output  of  a 
department  for  the  distributing  of  purely  departmental 
expenses.  In  fact,  the  direct  labor  cost  is  a  percentage 
plan,  only  it  is  not  an  arbitrary  percentage  plan,  since 
it  uses  for  a  base  one  of  the  factors  of  production. 

The  departmental  condition  where  an  arbitrary  per- 
centage may  be  safely  used  for  distribution  of  expense 
must  be  judged  by  direct  observation.  In  any  case  the 
percentage  method  will  fall  short  of  the  desired  standard 
in  the  matter  of  analyzing  expense  into  the  different  items 
of  which  it  is  composed. 

In  shops  where  the  material  constitutes  much  the 
larger  part  of  the  prime  cost,  and  where  the  processes  are 
uniform,  experience  has  shown  that  the  indirect  expenses 
may  be  distributed  either  on  the  tonnage  basis,  or  per 
hundred,  on  the  number  of  articles. 

In  similar  conditions,  where  the  material  does  not 
differ  in  grade  or  price  to  any  considerable  degree,  or 
where  the  business  is  really  little  more  than  assembling 
finished  parts  bought  in  the  market,  the  cost  of  the 
material  may  be  substituted  for  the  quantity  as  the  unit 


DISTRIBUTING    INDIRECT    EXPENSES  69 

of  distribution.  However,  such  special  conditions  rarely 
exist  in  a  business  of  much  size. 

There  are  also  cases  where  the  principle  of  the  machine 
rate  is  applied  to  the  operator  of  the  machine  instead 
of  to  the  machine  itself.  It  may  be  used  where  the  wages 
of  the  operators  are  difTerent,  and  where  operators  go 
from  one  machine  to  another. 

The  same  principle  is  sometimes  extended  to  cover  a 
whole  department;  that  is,  a  rate  is  made  for  the  total 
productive  labor  hours  of  all  the  men  in  the  department. 
It  has  been  called  the  "Sold  Hour"  plan  and  was  orig- 
inally devised  to  apply  to  the  printers'  trade.  It  is 
adapted  to  industries  where  any  man  in  a  department  may 
be  called  on  to  do  any  job  coming  to  that  department. 


CHAPTER  VI 

WAGE    SYSTEMS 

Since  the  prime  object  of  cost  systems  and  cost 
methods  is  to  increase  efficiency,  and  since  a  knowledge 
of  wage  systems  is  necessary  for  the  designing  of  a  proper 
cost  system,  it  is  very  necessary  that  the  accountant  be 
familiar  with  the  workings  and  advantages  of  the  various 
methods  of  paying  wages. 

The  purpose  here  is  to  present  and  explain  briefly  the 
different  wage  systems  that  are  commonly  recognized, 
and  to  indicate  certain  advantages  or  difficulties  con- 
nected with  their  adaptation  to  conditions.  No  one 
method  can  ever  be  recommended  as  the  best;  for  each 
has  its  own  characteristics,  which  make  it  peculiarly 
suited  to  some  conditions,  and  at  the  same  time  impos- 
sible in  others. 

The  general  methods  or  plans  of  paying  wages  are 
known  as: 

(i)  Day  Rate 

(2)  Piece-work 

(3)  Differential  (piece)  Rate 

(4)  Premium 

(5)  Bonus 

(6)  "Stint"  System 

(7)  Contract  System 

(8)  Profit  Sharing 

(9)  Stock  Distributing 

70 


WAGE    SYSTEMS 


71 


Each  plan  is  subject  to  more  or  less  modification. 
There  are,  particularly,  many  forms  of  the  premium  and 
bonus  systems,  some  of  which  are  known  as  the  "Dif- 
ferential Bonus,"  the  "Gantt  System,"  the  "Santa  Fe 
System,"  etc. 

(i)  Day  Rate 

The  "Day  Rate"  method  groups  several  workmen  in 
a  body,  and  pays  each  one  a  certain  sum  for  a  certain 
number  of  hours'  work,  this  amount  depending  partly  on 
the  skill  called  for,  partly  on  the  locaHty  in  which  the 
plant  is  placed,  and  partly  on  the  labor  conditions  exist- 
ing at  the  time.  This  is  the  original  elementary  method; 
and  since  all  the  other  plans  have  been  devised  in  an  effort 
to  get  away  from  it,  it  is  natural  to  assume  that  there  are 
grave  defects  connected  with  its  use. 

Many  of  these  can  be  traced  back  to  a  single  general 
cause,  "lack  of  incentive."  The  workman  has  Httle  or 
nothing  to  gain  by  putting  his  heart  in  his  work  and 
exerting  himself.  He  is  kept  up  to  about  a  certain  dead 
level  by  the  fear  of  losing  his  job,  and  that  is  all.  Why 
should  he  do  more  than  the  man  next  to  him,  when  they 
are  both  paid  alike?  This  reasoning  does  not  apply  to 
the  one  man  in  a  thousand  who  goes  ahead  and  by  sheer 
energy  makes  a  place  for  himself  "higher  up";  but  it 
does  apply  to  the  great  mass  of  workers.  The  result  is 
shown  in  both  quantity  and  quality  of  output. 

Still  another  objection  to  this  plan  comes  from  the 
difBculty  of  finding  labor  costs,  for  a  uniform  labor  cost 
per  week  is  nowhere  near  a  uniform  cost  per  article  made. 
The  wages  remain  even,  while  the  product  varies  from 
day  to  day,  and  still  more  between  man  and  man. 

There  are  classes  of  labor,  however,  for  which  no  other 
kind  of  rate  is  applicable.     Where  the  work  is  a  pure 


72  COST   ACCOUNTING 

function  of  time,  as  in  the  case  of  firemen,  watchmen,  in- 
spectors, etc.,  the  natural  rate  is  a  time  rate.  Repair  men, 
inventors,  and  men  who  are  planning  and  constructing 
special  machines,  also  come  under  a  time  rate,  because  of 
the  nature  of  their  work.  In  general,  indirect  labor  is 
more  suited  for  payment  by  time  than  direct  labor. 

(2)  Piece-work 

The  "Piece-work"  plan  is  a  system  of  paying  wages 
on  the  basis  of  the  amount  of  work  done,  the  rate  being 
based  on  past  experience  or  ascertained  by  test.  Under 
this  plan  the  employer,  after  making  what  he  considers 
a  fair  estimate,  sets  the  workmen's  rate  for  the  various 
operations  incident  to  the  production  of  an  article. 

If  the  rate  is  fair,  the  entire  arrangement  looks  so 
equitable  that  it  may  be  surprising  to  learn  that  in  many 
cases  much  friction  and  dissatisfaction  have  arisen  from  its 
use.    A  question  at  once  arises  concerning  the  cause. 

To  answer  this  we  may  sketch  an  imaginary  case.  An 
employer,  having  decided  to  introduce  the  piece-work 
system  in  his  business,  sets  out  to  determine  the  allow- 
ance he  should  make  on  each  piece  of  work.  He  and  his 
assistants  watch  the  men  and  their  work  for  some  time 
beforehand.  Then  he  makes  what  he  considers  a  fair 
allowance  for  the  increased  production  that  will  follow 
under  the  new  plan,  and  waits  for  results.  Under  the 
stimulus  of  payment  proportioned  to  efifort,  the  rate  of 
production  soon  shows  enormous  gains;  and  the  employer 
finds  that  production  has  increased  50  per  cent,  60  per 
cent,  or  has  even  doubled,  instead  of  increasing  accord- 
ing to  the  low  per  cent  he  allowed  in  discounting  the  new 
rates.  As  a  result,  the  men  who  were  earning,  say  $2.75 
per  day,  are  soon  earning  $4  or  more. 

By  this  time  the  employer  is  likely  to  think  that  his 


WAGE   SYSTEMS  73 

employees  cheated  him  in  the  beginning,  and,  as  a  result 
of  this,  are  now  receiving  altogether  too  much  pay;  so 
he  proceeds  to  cut  the  rate  per  piece,  and  the  trouble  with 
his  workmen  begins.  They,  on  their  part,  soon  discover 
that  they  are  between  two  fires;  if  they  produce  too  little 
their  wages  are  small,  and  if  they  produce  too  much  they 
receive  a  cut,  after  which  they  must  continue  to  work 
harder  and  receive  no  more  pay  than  they  did  formerly. 
The  natural  result  of  this  is  an  agreement  between  the 
workmen  in  each  class  to  limit  their  production  to  a  cer- 
tain amount  which  they  consider  safe.  At  this  point  the 
piece-work  system  has  broken  down  and  failed  in  the  pur- 
pose for  which  it  was  introduced. 

In  studying  the  above  instance,  two  conflicting  lines 
of  action  are  seen.  The  employer  is  working  for  the 
largest  possible  results  for  a  given  wage  scale,  and  the 
men  are  working  to  receive  the  maximum  wages  for  their 
time  and  work.  The  employer  must  have  had  in  mind 
that  the  wages  would  not  increase  much  over  what  they 
were  before,  or  at  least  not  in  the  same  proportion  as  the 
production  increased.  So  he  fails  to  see  where  he  has 
gained  anything  by  his  change  of  methods.  The  work- 
men consider  that  they  have  been  trapped  by  the  cut  in 
the  piece  rate,  and  are  correspondingly  bitter  over  the 
situation. 

It  is  clear  to  be  seen  that  the  critical  point  here  lies 
in  the  rate  per  article.  In  the  example  given,  the  em- 
ployer was  ignorant  as  to  just  what  the  men  could  do; 
and  this  is  the  basis  of  trouble  in  nine  cases  out  of  ten. 
To  establish  a  successful  piece-work  system  it  is  essential 
to  set  such  a  rate  that,  barring  unusual  business  depres- 
sion or  some  equally  untoward  event,  it  can  be  main- 
tained fixed  and  unchanging. 

If  the  employer  wishes  to  approximate  maximum  pro- 


74 


COST    ACCOUNTING 


duction,  he  must  be  prepared  and  willing  to  pay  more 
than  the  ordinary  day  rate  he  paid  before;  and  no  piece- 
work plan  will  attain  its  object  unless  he  takes  that  stand. 
If  he  can  afford  to  pay  a  certain  amount  for  the  making 
of  an  article  now,  he  can  surely  afiford  to  pay  the  same 
amount  per  article  when  a  larger  number  are  produced 
per  day;  and  all  the  more  so  because  the  indirect  ex- 
penses are  increased  comparatively  Httle  for  an  increased 
production  in  the  same  time,  while,  as  these  expenses  are 
distributed  over  a  larger  number  of  articles  produced,  the 
cost  of  each  article  is  proportionately  decreased. 

The  first  step  necessary  to  determine  the  proper  rate 
is  to  get  true  records  of  the  work  that  can  be  done.  In 
the  matter  of  small,  or  wholly  machine-made  articles,  this 
is  not  difificult.  If  the  operations  are  complex  and  in- 
clude much  handling  of  the  material,  it  will  be  necessary 
to  separate  the  whole  process  into  simple  operations,  and 
fix  a  time  for  each  one.  The  sum  of  these  time  rates, 
plus  a  percentage  for  unavoidable  delays,  will  determine 
the  time  to  be  taken  on  the  article  as  a  whole.  These 
analyses  are  important  items  in  establishing  a  cost  sys- 
tem; and  experience  has  shown  them  to  be  the  most  ac- 
curate and  practical  methods  of  fixing  the  proper  rate. 

(3)  Differential  (Piece)  Rate  Plan 

The  "Diliferential  Rate"  plan  is  a  specialized  piece- 
work method  modified  by  an  application  of  time  rate  to 
the  work.  The  idea  is  to  pay  a  certain  piece  rate  up  to 
a  certain  amount  of  production  in  a  given  time,  and  above 
that  amount  to  pay  an  increased  rate  either  on  the  whole 
amount  produced,  or  only  on  the  output  above  the  set 
standard. 

The  considerations  and  cautions  mentioned  in  the 
straight  piece-work  plan  are  all  applicable  here,  and  with 


WAGE    SYSTEMS  75 

double    force,    since    the   ideas   are    the    same   but    more 
emphasized. 

The  dififerential  rate  plan  is  devised  specially  to  meet 
conditions  where  the  indirect  expenses  are  relatively  very 
large.  To  get  the  best  results  in  such  a  case  the  pro- 
ductive capacity  must  be  made  as  effective  as  possible 
even  at  a  sacrifice  in  the  labor  cost.  What  is  lost  there 
will  be  more  than  made  up  by  distributing  the  large 
amount  of  indirect  expenses  over  the  increased  output. 
The  principal  disadvantage  connected  with  the  differential 
plan  lies  in  the  danger  of  making  ill-judged  rates  at  its 
introduction.  The  utmost  skill  and  judgment  are  neces- 
sary to  guard  against  this.  The  differential  rate  plan 
also  calls  for  a  well-organized  supervising  corps,  the 
actual  increase  of  cost  for  this  depending  entirely  on  local 
conditions,  the  nature  of  the  shop,  and  the  organization. 

(4)  Premium  Plan 

The  "Premium"  plan,  together  with  its  modifications, 
differs  from  piece-work  methods  in  basing  the  wages  pri- 
marily on  a  time  rate  instead  of  on  the  product,  and  then 
paying  extra  wages  for  time  saved  in  the  operations.  It 
resembles  piece-work  in  that  it  presupposes  fixing  a  time 
rate  on  the  process  of  manufacturing  single  articles,  or 
on  the  separate  steps  in  such  processes.  The  fact  that 
it  guarantees  a  minimum  wage,  at  least,  places  it  in  a 
more  favorable  light  before  employees,  and  often  results 
in  less  opposition  on  their  part  to  its  introduction  than 
they  show  toward  the  piece-work  plan. 

(5)  Bonus  Plan 

Linked  to  the  premium  plan  and  related  to  it  in  gen- 
eral principles,  are  the  several  forms  of  "Bonus"  plans. 
There  is  an  increase  of  pay  as  the  time  to  do  a  definite 


^6  COST   ACCOUNTING 

amount  of  work  is  shortened;  but  instead  of  being  cal- 
culated directly  from  the  time  saved,  it  takes  the  form  of 
an  increase  in  the  hourly  wages  for  the  time  actually 
spent,  the  rate  depending  on  the  per  cent  of  time  gained, 
and  increasing  in  proportion. 

(5a)  Gillette  and  Dana  Bonus  Plan 

A  form  of  the  bonus  system  described  by  Gillette  and 
Dana  proposes  to  pay  each  workman  a  daily  wage  plus 
a  piece  rate  on  each  unit  in  excess  of  a  specified  minimum. 
Thus,  a  laborer  receives  $1.50  a  day  for  shoveling  earth, 
and  on  each  cubic  yard  in  excess  of  15  cubic  yards  per 
day,  he  receives  a  bonus  of  7  cents  per  yard.  If  he  shovels 
25  cubic  yards,  he  receives  $1.50  plus  $o.7o=$2.20. 

(5b)  Differential  Bonus  Plan 

The  "Differential  Bonus"  is  much  the  same,  except 
that  there  is  an  increasing  scale  for  big  performances. 
In  the  foregoing  example  the  workman  might  receive  7 
cents  bonus  for  every  cubic  yard  above  15,  and  an  ad- 
ditional 7  cents  bonus  for  every  cubic  yard  over  20.  His 
day's  pay  for  the  above  work  would  then  be  $1.50  plus 
$0.35  plus  $o.7o=$2.55. 

(5c)  Gantt  System 

The  Gantt  system  of  differential  payment  is  known  as 
"Task  Work  with  a  Bonus."  A  high  standard  is  set,  but 
one  entirely  possible  of  attainment.  The  workman  re- 
ceives a  regular  day  rate;  and  in  addition,  if  he  reaches 
the  standard,  he  is  paid  a  lump  bonus,  which  may  be  25 
per  cent  or  33  1-3  per  cent  more  than  his  regular  wages. 
This  system  seems  to  have  worked  out  very  well  in  prac- 
tice, and  it  is  specially  recommended  as  a  good  transition 
step  from  the  old  day  rate  to  some  form  of  piece-work. 


WAGE    SYSTEMS  77 

A  very  important  feature  of  the  Gantt  plan  is  the 
bonus  that  the  foreman  gets  for  every  man  under  him 
who  makes  his  bonus.  Thus,  if  a  foreman  had  twelve 
men  under  him  and  eight  of  the  twelve  made  their  bonus, 
the  foreman  would  get,  say  80  cents  bonus,  or  10  cents 
for  each  man.  The  result  in  practice  has  been  to  make 
the  foreman  a  teacher  of  the  men,  invariably  giving  his 
attention  to  the  men  below  grade  in  order  to  get  them 
up  to  the  bonus  standard. 

(5d)  Sundry  Bonus  Systems 

The  names  "Merit,"  "Standard  Operation  Plan," 
"Gain-Sharing,"  and  others,  are  sometimes  given  to  wage- 
payment  plans  worked  out  in  particular  shops  or  in- 
dustries. If  they  differ  at  all  from  plans  here  described, 
it  is  only  in  details  devised  to  meet  particular  conditions. 

Since  the  plans  described  as  "Premium"  or  "Bonus" 
are  so  closely  related  in  object  and  principle,  they  may 
be  grouped  together  for  discussion  and  comparison  with 
other  methods. 

In  introducing  a  premium  or  bonus  system,  the  same 
caution  must  be  observed  as  with  the  piece-work  sys- 
tems. It  is  essential  to  be  quite  sure  of  the  correct 
standard  before  the  step  is  taken,  if  the  disastrous  re- 
sults that  have  accompanied  too  high  piece  rates  are  to  be 
avoided.  If  an  error  is  made  on  the  side  of  too  high  a 
scale,  it  is  less  costly  than  in  piece-work,  because  the  em- 
ployer is  not  working  on  so  narrow  a  margin;  also,  the 
effect  of  such  an  error  would  be  more  evenly  divided. 

(6)  "Stint"  System 

In  the  "Stint"  system  the  appeal  is  made  to  the  work- 
man by  a  gift  of  all  the  time  he  may  save.  A  certain 
output  is  assigned  as  a  day's  or  a  week's  work.     If  he 


78  COST    ACCOUNTING 

does  it  in  less  time,  say  seven  hours,  he  has  earned  his 
wages  and  is  free  to  go  home. 

(7)  Contract  System  and  List  Percentage  System 

Each  employee  is  regarded  as  a  contractor  who  has  a 
given  time  to  finish  a  definite  job.  As  in  the  case  of  the 
"Stint"  system,  if  he  gets  through  beforehand  he  has 
earned  his  wages,  but,  instead  of  leaving,  he  undertakes 
a  new  contract.  In  some  cases  he  is  penaHzed  if  his 
work  is  not  done  in  contract  time. 

When  the  units  of  work  are  large,  the  foreman  often 
becomes  the  contractor,  and  becomes  responsible  for  the 
completion  of  the  job.  There  is  a  wide  amount  of  free- 
dom in  the  arrangements  for  wage  paying  and  profit  mak- 
ing between  him  and  the  management.  Under  the  con- 
tract system  in  its  pure  form,  he  hires  his  own  men  and 
arranges  the  work  as  seems  best  to  him,  while  the  com- 
pany allows  him  a  certain  amount  for  the  job.  Anything 
that  he  saves  out  of  this  goes  to  him  as  profit.  Strict  in- 
spection of  his  work  is  necessary,  of  course,  to  hold  him  up 
to  the  proper  standard. 

(8-9)  Profit  Sharing  and  Stock  Distributing 

The  "Profit  Sharing"  plan  provides  that  the  workmen 
shall  share  in  a  certain  percentage  of  the  profits  of  the 
shop  as  a  whole. 

Stock  distributing  makes  the  employee  a  part  owner 
in  the  business,  and  so  gives  him  an  interest  and  incentive 
to  use  his  best  efforts  for  its  welfare. 

A  special  form  of  profit  sharing  which  has  proved  suc- 
cessful in  operation,  though  it  can  be  used  only  under 
special  conditions,  consists  in  setting  a  price  on  every 
article  manufactured.  The  factory  is  charged  only  with 
such  expenditures  as  relate  directly  to  the  production  of 


WAGE    SYSTEMS  ^C) 

this  article  and  over  which  the  factory  management  has 
supervision.  Credit  is  then  given  to  the  factory  at  these 
scheduled  prices  for  all  articles  produced,  whether  they 
are  sold  or  not.  At  the  end  of  the  year,  or  when  an 
actual  inventory  is  taken,  the  factory  account  in  the 
ledger  will  show  the  factory  profit,  and  will  represent  the 
saving  or  difference  between  the  actual  cost  and  scheduled 
prices.  The  saving,  according  to  this  plan,  is  distributed 
among  the  foremen  of  the  various  departments,  and  some- 
times among  the  employees  as  well,  according  to  the  rate 
of  pay  of  each.  A  penalt}'  is  provided  for  poor  attend- 
ance; and  other  penalties  of  various  kinds  may  be  incor- 
porated in  the  plan,  according  to  the  conditions  under 
which  it  is  operated. 

I 


CHAPTER  VII 

RECORDING  THE  MATERIAL  AND  LABOR  COSTS 

Requirements  of  Cost  Finding 

The  final  cost  of  any  order,  article  or  process  may  be 
divided  into  four  principal  parts,  viz: 

(i)  Material  cost 

(2)  Labor  cost 

(3)  Department  indirect  expense 

(4)  General  indirect  expense 

Three  important  considerations  are  involved  in  arriv- 
ing at  final  costs. 

(i)  The  cost  data  must  be  recorded. 

Reports  and  forms  are  devised  upon  which  are  recorded 
the  various  transactions  involving  raw  or  part-finished 
material,  the  time  spent  by  employees  upon  various  jobs 
and  operations,  the  wages  paid,  and  the  amounts  that  go 
to  make  up  the  various  items  of  indirect  expense.  These 
forms  are  the  original  records. 

(2)  The  cost  data  must  be  compiled  and  dis- 
tributed. 

The  data,  as  recorded,  must  be  arranged  and  classified 
so  as  to  facilitate  the  distribution  of  costs  to  the  particu- 
80 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     8l 

lar  class  of  product,  to  the  department,  or  to  the  opera- 
tion, as  the  case  may  be. 

(3)  The  cost  books  must  be  interlocked  with 
the  financial  books. 

The  cost  books  contain  the  data  showing  the  analysis 
of  the  elements  of  cost,  all  of  which  should  be  controlled 
by  the  financial  books,  so  as  to  permit  of  a  verification  of 
the  mathematical  accuracy  of  the  transactions  in  the  cost 
records. 

Recording  the  Material  Cost 

The  transactions  that  deal  with  material  may  be  classi- 
fied as  buying  it,  receiving  it,  storing  it,  putting  it  into 
operation,  tracing  it,  and  re-storing  it  as  part-finished  or 
finished  stock.  Part-finished  stock  includes  all  parts  of 
the  product  made  in  different  parts  of  the  plant  and 
transferred  either  to  stock  or  to  an  assembling  depart- 
ment. Any  product  on  which  the  operating  processes 
have  begun  but  are  not  yet  finished,  is  termed  work  in 
process,  except  where  part-finished  stock  is  transferred 
from  Work  in  Process  account  to  Part-Finished  Stock 
account. 

The  forms  upon  which  information  about  material  is 
ordinarily  recorded,  are: 

(i)  Purchase  Requisition 

(2)  Purchase  Order 

(3)  Material  Received  Sheet 

(4)  Stock  Record — Raw  Material 

(5)  Production  or  Factory  Order 

(6)  Material  Requisition  or  Bill  of  Material 

(7)  Inventory  Test 


82  COST   ACCOUNTING 

When  the  information  on  any  of  these  records  is  to 
be  used  by  different  departments,  carbon  copies  should 
be  provided,  the  duplicates  being  distinguished  by  differ- 
ent headings,  colors,  or  textures  in  the  card  or  paper. 


(i)  Purchase  Requisition  (Form  i) 

A  "Purchase  Requisition"  is  a  request  for  the  pur- 
chase of  raw  material  or  supplies,  made  out  preferably 
by  the  stores  clerk,  but  sometimes  by  the  superintendent, 
or  the  man  in  charge  of  the  department  requiring  the 
material  or  supplies.  Every  factory  should  determine 
standard  maximum  and  minimum  amounts  of  raw  stock 
and  supplies  to  be  carried,  below  which  it  is  not  safe  to 
go  on  account  of  the  risk  of  delay  in  filling  orders,  and 
above  which  it  is  inadvisable  to  go  on  account  of  the 
capital  that  would  be  tied  up.  This  being  settled,  the 
maximum  and  minimum  amounts  to  be  carried  should 
be  posted  where  the  material  is  stored,  and  should  also 
appear  on  the  stock  record.  When  the  amount  on  hand 
approaches  or  passes  the  minimum,  a  purchase  requisi- 
tion is  made  out,  and  after  being  approved  by  some  per- 
son in  authority,  is  sent  to  the  purchasing  department. 
A  rush  order  should  be  so  indicated  on  the  requisition. 

A  form  of  this  description  does  not  usually  enter  into 
the  practical  part  of  a  cost  system.  It  may  be  properly 
termed  an  organization  form,  pure  and  simple.  It  must 
clearly  indicate  the  material  desired,  but  beyond  this  al- 
most any  design  will  answer  the  purpose  intended,  as  the 
information  on  the  form  is  not  often  needed  after  the  goods 
ordered  have  been  received. 

(2)  Purchase  Order  (Form  2) 

The  filing  of  catalogues  and  quotations  is  a  matter  of 
ofBce  organization,  and  only  the  purchase  order  concerns 


1 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     83 

the  cost  clerk.  The  form  is  made  out  in  duplicate,  or  in 
as  many  more  copies  as  desired.  The  original  copy  goes 
to  the  selling  firm,  and  the  duplicate  is  kept  by  the  pur- 
chasing concern  on  the  file  of  unfilled  orders.  The  purchase 
order  is  given  a  serial  number,  which  should  be  entered 
by  the  selling  firm  on  its  invoice,  as  a  means  of  simplifying 
reference  to  the  order  if  any  question  arises. 

Should  it  be  desired  to  use  a  copy  of  the  purchase 
order  as  a  material  received  record,  short  width  carbon 
paper  is  used,  and  a  triplicate  copy  made  containing  the 
items  only,  without  specifying  the  quantity  or  price.  The 
copy  goes  to  the  receiving  clerk,  who  then  enters  in  the 
"Quantity"  column  of  the  order  the  actual  amount  of 
material  received.  The  receiving  clerk  is  thus  compelled 
to  count  or  measure  the  incoming  material,  and  cannot 
shirk  this  duty  by  using  the  figures  on  the  purchase  or- 
der. When  the  goods  have  been  received,  counted  and 
inspected,  the  triplicate  is  returned  to  the  office  for  the 
purpose  of  checking  it  with  the  material  as  billed  upon 
the  invoice  from  the  creditor;  and  claims  for  shortage  or 
damaged  goods  can  then  be  made  at  once. 

(3)  Material  Received  Sheet  (Forms  3  and  4) 

Where  it  is  not  advisable  to  use  a  copy  of  the  pur- 
chase order  as  a  material  received  record,  a  distinct  and 
separate  form  is  used. 

The  choice  of  forms  for  this  purpose  will  depend 
largely  upon  whether  charges  consisting  of  freight,  dray- 
age,  etc.,  on  raw  material  received  are  to  be  added  to  the 
material  cost.  If  this  is  not  the  case,  a  very  simple  form 
will  answer  the  purpose;  but  if  such  charges  are  included, 
the  design  will  depend  largely  on  the  class  of  product  re- 
ceived and  the  distribution  of  the  charges. 

Provision  should  be  made  on  the  material  received 


84  COST   ACCOUNTING 

record  for  showing  the  purchase  order  number,  the  items, 
name  of  article,  quantity,  and  the  apportioned  amount 
of  freight  and  deHvery  charges  for  each  item,  if  these 
charges  are  to  be  added  to  the  material  cost.  If  the  ma- 
terial is  to  be  used  at  once,  especially  for  certain  orders 
or  departments,  columns  may  be  provided  for  recording 
the  distribution  of  the  cost  and  the  charges. 

If  the  goods  are  not  to  be  opened  until  they  are  used 
in  certain  departments,  the  invoice  must  be  accepted 
temporarily  as  the  record,  and  any  "over,  short  or  d...ii- 
age"  claim  made  later.  It  will  be  seen  that  the  purchase 
requisition,  purchase  order,  material  received  sheet  and 
invoice  act  as  a  complete  check  of  the  transactions  from 
four  different  sources.  One  reason  for  using  a  material 
received  sheet  to  report  goods  received,  instead  of  fol- 
lowing the  usual  method  of  checking  up  from  the  invoice, 
is  to  insure  an  actual  count  and  inspection  of  the  goods, 
with  the  resulting  accuracy  secured,  instead  of  depending 
entirely  upon  the  honesty  or  carefulness  of  the  clerk  re- 
ceiving the  goods  or  checking  them  ofif. 

(4)  Stock  Record — Raw  Material  (Forms  10,  11,  12) 

The  "Stock  Record"  is  one  of  the  most  important  of 
the  factory  records.  It  bears  the  same  relation  to  stock 
that  the  cash  book  does  to  money,  and  should  be  kept 
with  just  as  much  care  as  the  cash  book.  Stock  repre- 
sents money,  and  is,  indeed,  only  another  form  of  it.  In 
the  same  way  that  the  cash  book  shows  the  receipt  and 
disbursement  of  money  and  the  balance  on  hand,  the 
stock  record  shows  the  material  received,  material  de- 
livered, and  what  should  be  in  the  storeroom. 

The  effectiveness  of  a  stock  record  depends  much  on 
the  actual  storeroom  accommodation,  and  on  precau- 
tions taken  for  not  allowing  any  but  properly  authorized 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     85 

persons  to  remove  material  from  its  designated  place.  If 
access  to  the  storeroom  is  easy  for  anyone,  material  is 
likely  to  be  taken  to  fill  orders  when  the  material  requisi- 
tion is  incomplete;  or  the  men  will  replace  material  dam- 
aged in  process,  without  making  a  record  of  such  with- 
drawals. The  latter  is  an  important  leak,  and  must  be 
watched  closely,  for  if  it  exists,  it  both  falsifies  the  costs 
and  creates  trouble  in  the  stores  department. 

The  storeroom  should  be  centrally  placed,  unless  a 
separate  storeroom  is  conducted  for  each  department.  In 
the  latter  case  the  storeroom  and  tool-room  may  be  run 
in  connection  with  each  other.  The  racks,  bins,  etc., 
should  be  arranged  with  reference  to  the  materials,  so 
that  the  whole  will  have  an  orderly  appearance  and  not 
look  like  a  junkroom.  Disorder  in  appearance  tends  to 
create  disorder  in  handling.  The  matter  of  bin  tickets 
and  finding  lists,  etc.,  depends  on  whether  the  stores  are 
complex  and  contain  a  great  variety  of  articles  more  or 
less  similar. 

To  record  the  location  of  material  and  to  save  time 
and  space,  a  system  of  reference  numbers  and  letters 
should  be  devised.  Thus  B-4-C-17  might  mean  a  4-inch 
bolt  to  be  found  in  division  C,  section  17,  in  the  store- 
room, where  B  is  the  reference  letter  that  stands  for  all 
bolts.  These  symbols  may  be  used  throughout  the  sys- 
tem of  records  and  accounts  with  a  great  saving  of  time 
and  trouble. 

Special  storerooms  or  yard  places  should  be  reserved 
for  heavy  and  cumbersome  materials,  close  to  the  place 
where  these  materials  will  be  needed. 

A  systematically  conducted  stock  record  performs 
other  valuable  functions  besides  showing  leaks.  One  of 
the  most  important  of  these  is  to  provide  the  data  for  the 
"perpetual"  or  "going"  inventory.     The  troubles  of  in- 


86  COST   ACCOUNTING 

ventory  taking  are  well  known.  It  usually  takes  a  long 
time,  causes  much  work,  and  sometimes  necessitates  the 
temporary  closing  of  the  plant.  Even  then  the  accuracy 
of  the  inventory  is  questionable,  especially  as  to  goods 
in  process;  yet  its  information  is  essential  in  the  prepara- 
tion of  any  reliable  statement  of  financial  standing  and 
earnings.  With  a  well-kept  stock  record  these  usual  in- 
ventory troubles  are  avoided,  as  a  complete  inventory  is 
at  hand  at  any  time,  showing  both  the  amount  and  the 
value  of  materials  in  the  storeroom,  in  process,  and  in 
finished  parts.  In  order  to  do  all  this,  the  record  must 
be  designed  with  columns  for  material  ordered,  received, 
requisitioned  out,  and  balance  on  hand. 

Besides  these  columns  for  inventory  information,  extra 
columns  may  be  added  to  distinguish  between  material 
reserved  for  orders  already  received  and  the  balance 
available.  This  distinction,  together  with  the  record  of 
the  maximum  and  minimum  amounts,  and  a  column  show- 
ing material  ordered  but  not  yet  received,  gives  all  the 
information  necessary  for  keeping  the  stock  supplies  up 
to  working  requirements  in  every  respect. 

When  the  same  article  is  carried  in  stock  in  numerous 
sizes,  colors,  styles,  etc.,  it  is  sometimes  advisable  for  easy 
reference  to  use  one  sheet  for  the  article  as  a  class,  and 
group  the  different  varieties  in  separate  columns.  Active 
stock  will  require  separate  sheets  for  each  article;  but 
where  purchases  are  infrequent  and  the  stock  is  drawn  out 
in  large  quantities,  one  sheet  may  be  sufTficient  for  sev- 
eral, blank  lines  being  left  between  the  different  articles. 

The  stock  record  should  be  verified  from  time  to  time 
by  actual  count,  so  that  any  discrepancy  or  leak  may  be 
discovered.  It  is  good  policy  to  verify  a  certain  number 
of  articles  each  day  or  week,  without  letting  it  be  known 
in  advance  which  articles  are  to  be  inventoried.     This 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     87 

plan  is  described  in  connection  with  the  inventory  test 
(Form  60). 

(5)  Production  or  Factory  Order  (Forms  13-17) 

The  importance  of  the  production  order  depends  on 
the  functions  it  is  designed  to  perform.  In  practice  it 
ranges  from  a  mere  informal  notice  to  begin  operations  upon 
a  certain  class  of  work  up  to  a  complete  controlling  and 
cost-finding  agent  of  a  special  order.  Its  primary  pur- 
pose is  to  substitute  written  for  verbal  instructions,  so  as 
to  avoid  mistakes.  Besides  this,  it  may  be  so  designed 
as  to  describe  the  order,  state  the  material,  patterns  and 
dies  needed,  plan  the  work  as  to  time  and  department,  trace 
the  work  at  any  stage,  report  the  actual  production  and 
classify  it  as  good  or  defective,  collect  the  costs  as  they 
are  incurred,  and  also  show  their  distribution.  It  is  not 
recommended,  however,  that  the  form  be  used  for  all  these 
purposes,  except  under  certain  conditions  in  a  special  order 
system. 

Production  orders  are  of  three  kinds,  and  each  kind 
should  have  a  distinctive  size,  color,  or  heading,  as  the 
costs  incurred  are  of  different  nature  and  must  be  charged 
to  different  accounts.     The  three  classes  of  orders  are: 

(i)  Manufacturing  production  order,  which  ap- 
plies to  the  regular  output  of  the  factory. 

(2)  Shop  production  order,  which  provides  for 
construction,  renewals,  or  changes  in  the  factory. 

(3)  Repair  production  order,  for  making  neces- 
sary repairs  to  the  equipment. 

As  many  copies  of  the  production  order  may  be  pre- 
pared as  the  conditions  demand.  One  copy  may  go  to  the 
stock  clerk,  so  that  he  will  know  what  the  requisitions 


88  COST   ACCOUNTING 

should  call  for,  and  prevent  employees  from  taking  out 
materials  for  an  order  not  issued.  When  a  copy  is  used  in 
this  way,  the  stock  clerk  should  check  the  material  that  re- 
lates to  the  order,  and  should  not  deliver  any  extra  material 
except  upon  the  authority  of  the  superintendent  or  man- 
ager, any  such  supplementary  requisition  giving  the  rea- 
son why  additional  material  is  required.  Used  in  this 
way,  the  production  order  guards  against  dishonesty,  and 
brings  to  light  mistakes  and  defective  work. 

A  second  copy  may  be  sent  to  the  shipping  clerk  with 
directions  as  to  the  disposition  of  the  finished  product,  so 
as  to  facilitate  deliveries.  A  copy  may  also  be  kept  at 
hand  in  the  manager's  office  to  inform  him  of  the  orders 
that  are  being  worked  on  in  the  shop. 

When  an  order  is  issued  covering  a  product  that 
passes  through  several  departments,  some  of  which  re- 
quire different  specifications,  or  when  the  work  on  the 
order  is  to  go  on  simultaneously  in  several  departments, 
sub-production  orders  may  be  issued  for  the  work  of  each 
department.  If  the  work  is  well  systematized  in  the  fac- 
tory, sub-production  orders  may  be  issued  at  once,  to  all 
departments,  stating  the  exact  day  the  order  is  supposed 
to  reach  them.  If  the  work  falls  behind  the  schedule,  it 
is  known  at  once;  and  the  foreman  of  the  department  in 
which  the  delay  occurs  is  asked  to  explain.  This  method 
of  keeping  work  up  to  schedule  time  is  especially  valuable 
in  case  of  orders  where  shipment  is  guaranteed  by  a  cer- 
tain date. 

The  production  order  may  also  be  in  coupon  form, 
each  department  filling  out  its  coupon  and  turning  it  in 
at  the  time  the  job  is  transferred  to  the  next  department. 
The  work  can  thus  be  located  at  any  time  by  the  coupons 
on  file.  When  used  in  this  way,  the  production  order 
takes  the  place  of  the  piece  tag  which  is  often  used  to  fol- 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     89 

low  a  job  through  the  plant,  and  which  shows  that  the 
necessary  material  for  a  particular  job  has  not  been  ap- 
propriated for  other  uses. 

If  the  production  order  is  used  to  record  the  cost  in 
addition  to  regulating  the  production,  the  form  should 
be  designed  to  show  the  material  used,  employees'  time 
and  wages,  and  indirect  expenses.  Provision  may  also  be 
made  for  the  classifying  of  such  special  indirect  expenses 
as  can  be  charged  directly  to  the  order.  The  design 
should  be  such  that  the  cost  clerk  may  arrange  the  data 
and  ascertain  the  total  cost  of  the  order  directly  on  the 
form.  The  order  then  serves  the  purposes  both  of  collec- 
tion and  of  compilation. 

When  an  order  covers  large  contract  work  it  is  often 
desirable  to  divide  it  among  departments  and  into  sec- 
tions— "sections"  here  meaning  not  parts  of  the  depart- 
ment, but  parts  of  the  work  to  be  done.  The  time  of  the 
employees  should  then  be  reported,  showing  the  time  con- 
sumed in  each  department  on  each  section  of  the  work. 
By  using  section  numbers  it  is  possible  to  compare  costs 
with  estimates,  and  to  follow  the  progress  of  the  work 
more  intelligently. 

(6)  Material  Requisition  or  Bill  of  Material  (Forms  18-23) 

(i)  A  "Material  Requisition"  is  generally  used  where 
the  material  consumed  on  orders  is  subject  to  constant 
changes.  It  is  made  out  by  the  department  requiring  the 
stock,  and  presented  to  the  stock  clerk,  who  may  com- 
pare the  requisition  with  the  corresponding  production 
order  before  honoring  it.  The  requisition  should  be  dated 
and  numbered,  should  show  in  detail  the  description  and 
quantity  of  the  material  wanted,  should  be  signed  by  the 
party  receiving  the  material,  and  approved  by  some  one  in 
authority.      Provision    for   costing   the   material   requisi- 


90 


COST   ACCOUNTING 


tioned  out  will  depend  upon  the  stock  system  in  use — 
that  is,  upon  whether  the  system  provides  for  showing 
quantity  only,  or  both  quantity  and  amount. 

(2)  A  "Bill  of  Material"  may  be  compared  with  a  regu- 
lar formula,  and  is  used  when  consumption  of  material  is 
definite.  It  takes  the  place  of  material  requisitions  in  fac- 
tories where  the  same  articles  are  manufactured  repeatedly, 
using  the  same  amount  of  material.  A  bill  of  material  is 
made  out  for  each  article  manufactured,  and  a  copy  given  to 
the  stock  clerk.  When  the  production  order  is  used  as  a 
material  requisition  all  that  is  necessary  is  to  present  a  copy 
of  the  same  to  the  stock  clerk,  and  he  will  give  out  the 
material  according  to  the  amount  to  be  manufactured. 

No  material  should  ever  be  issued  not  covered  by  the 
bill  of  material,  unless  on  a  supplementary  material  requi- 
sition, showing  either  that  there  is  something  wrong  in 
the  original  bill,  or  that  there  has  been  defective  material 
or  work.  Nor  should  any  material  ever  be  given  out  with- 
out a  receipt  from  the  party  taking  it. 

Where  many  different  kinds  of  material  are  used  in 
one  article,  and  the  product  of  the  plant  is  fairly  standard, 
the  bill  of  material  may  be  printed  in  quantities  accord- 
ing to  articles,  and  the  printed  copies  used  as  separate 
requisitions.  When  the  material  for  an  order  is  required, 
the  bill  of  material  given  to  the  stock  clerk  should  specify 
the  order  number,  as  well  as  the  number  of  articles. 
When  the  material  is  drawn  out  the  stock  clerk  should 
check  it  and  have  it  receipted  for  as  it  is  delivered. 

In  the  event  of  material  being  returned  to  stock,  a 
storeroom  credit  slip  should  be  issued  and  be  attached 
to  the  original  requisition,  or,  if  preferred,  a  regular  form 
of  material  requisition  or  bill  of  material  may  be  used 
and  stamped  "Returned." 

Where  operations  are  suspended,  to  be  taken  up  again 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     91 

later,  or  where  the  product  is  not  assembled  until  after 
sale,  much  of  the  material  finds  its  way  back  to  store- 
rooms, and  must  be  drawn  out  by  supplementary  requisi- 
tions. The  part-finished  stock  or  finished  parts'  requisi- 
tion is  made  out  by  the  assembling  department,  or  by  the 
sales  department  if  the  parts  are  sold  separately. 

Where  a  process  system  is  used,  and  the  cost  is 
charged  to  the  process,  and  not  to  an  order  number,  the 
bill  of  material  may  be  made  out  according  to  operating 
departments;  and  the  list  of  material  classification  need 
cover  only  the  items  used  in  that  particular  department  or 
process. 

(7)  Inventory  Test  (Form  60) 

This  form  is  intended  only  for  testing  the  correctness 
of  the  book  inventory,  i.  c,  the  stock  record,  and  may  be 
used  in  connection  with  raw  material,  part-finished  and 
finished  stock,  and  sometimes  with  goods  in  process  of 
manufacture,  depending  upon  the  system  in  use.  Where 
inventories  are  not  taken  at  frequent  intervals,  some 
means  of  testing  the  correctness  of  the  book  inventory 
should  be  provided.  The  reliability  of  cost  figures  de- 
pends to  a  great  extent  upon  the  correctness  of  the  rec- 
ords showing  the  quantity  of  stock  received  and  delivered 
to  the  operating  departments  of  the  factory. 

Whenever  it  is  desired  to  test  the  correctness  of  the 
book  inventory  as  to  any  particular  class  of  material,  the 
stock  clerk  should  enter  the  article  and  location  only  on 
the  inventory  form,  after  which  the  amount  of  the  ma- 
terial on  hand  should  be  counted  and  entered  under  the 
caption  "Actual  Count."  The  amount  on  hand,  as  shown 
by  the  book  inventory,  should  then  be  entered  under  the 
caption  "Book  Inventory,"  and  if  these  figures  are  the 
same  as  the  actual  count,  the  form  should  be  dated  and 


92 


COST   ACCOUNTING 


filed  for  reference.  If,  on  the  contrary,  there  is  a  dififer- 
ence  between  the  book  inventory  and  actual  count,  the 
difference  should  be  stated,  and,  if  possible,  the  cause 
ascertained. 

A  difiference  between  the  actual  count  and  the  book 
inventory  will  represent  either  errors  in  the  stock  records 
or  material  taken  out  of  stock  without  a  requisition.  If 
the  difference  cannot  be  located,  so  that  the  proper  cor- 
rections may  be  made  on  the  records,  the  amount  of  the 
difiference  should  be  charged  or  credited  as  the  case  may 
be  to  the  proper  stores  account,  and  posted  to  the  account 
styled  "Over,  Short  and  Damage." 

Recording  the  Labor  Cost 

Labor  often  constitutes  the  most  important  and  in- 
fluential element  in  manufacturing  and  production  cost. 
Small  variations  in  the  methods  of  handling  the  men  and 
their  reports  may  lead  to  great  differences  in  results. 
That  this  importance  is  realized  is  shown  by  the  large 
number  of  firms  manufacturing  devices  for  regulating 
labor  and  gathering  and  compiling  the  labor  costs.  Time 
clocks,  time  stamps,  patent  time  cards,  etc.,  of  many 
makes  are  on  the  market  for  factory  use.  The  complex 
and  variable  conditions  that  exist  in  manufacturing 
naturally  necessitate  a  wide  variety  of  methods  and  forms 
for  gathering  the  costs. 

All  forms  for  this  purpose  may  be  termed  "Time  Re- 
ports." Without  regard  to  any  particular  design,  the 
successful  operation  of  such  reports  depends  largely  on 
the  manner  in  which  they  are  introduced.  Clerical  labor 
on  the  part  of  factory  employees  should  be  reduced  to  a 
minimum,  so  as  not  to  antagonize  the  men  or  the  man- 
agement; and  what  detail  work  is  necessary  should  be 
made  as  much  a  matter  of  easy  routine  as  possible. 


! 


'         RECORDING  THE  MATERIAL  AND  LABOR  COSTS     93 

Requisites  of  Time  Reports 

j       Some  of  the  questions  that  should  be  considered  in 
choosing  or  designing  time  reports  are  as  follows: 

(i)  Is  the  form  to  be  filled  in  by  an  employee, 
or  a  time  clerk,  or  will  a  mechanical  device  such  as 
a  time  stamp  be  used? 

The  first  two  methods  are  subject  to  the  criticisms 
that  they  are  inaccurate,  give  opportunity  for  "doctor- 
ing" reports,  interrupt  the  w^ork  too  much,  or  require  too 
much  clerical  labor.  The  time  stamp  or  time  clock  reme- 
dies much  of  this;  and  in  the  end  the  installation  of  such 
devices  will  be  less  costly  than  the  trouble  which  arises 
from  other  methods,  especially  if  the  factory  is  of  any 
size  or  complexity. 

(2)  Is  the  form  to  show  the  time  daily,  w^eekly 
or  monthly? 

(3)  Is  the  form  to  show  time  only,  or  both  time 
and  cost? 

If  cost  is  to  be  included  this  w-ill  call  for  additional 
columns  for  the  cost  and  perhaps  its  distribution. 

(4)  Is  it  to  show  direct  production  costs  only, 
indirect  only,  or  a  combination  of  both? 

(5)  Is  it  to  be  used  by  individual  employees  or 
by  department  groups? 

Combination  reports  for  all  the  men  doing  the  same 
class  of  work  may  be  entered  on  a  single  sheet,  which 
may  also  be  arranged  in  a  pay-roll  form  and  used  as  a 
part  of  the  general  pay-roll. 


Q4  COST   ACCOUNTING 

(6)  What  is  the  wage  system  in  use? 

If  piece-work,  the  report  need  show  the  quantities 
and  time  only,  the  cost  being  left  to  appear  on  the  pay- 
roll and  cost  records.  When  the  work  is  partly  day-work 
and  partly  piece-work,  either  additional  columns  or  sepa- 
rate forms  may  be  chosen.  If  a  sHding  wage  scale  is 
used,  as  in  the  dififerential  rate  or  premium  system,  the 
costs  should  appear  on  the  report,  separate  columns  being 
added  if  desired,  to  show  the  extra  wages  earned.  The 
rates  may  also  be  printed  on  the  card. 

(7)  Are  the  reports  based  on  the  time  for  one 
article  or  process,  or  on  the  number  of  articles  per 
unit  of  time?  H 

If  the  latter,  the  report  may  provide  for  data  covering 
several  days  or  a  week.  If  the  former,  the  report  should 
have  columns  showing  the  labor  cost  applying  to  each 
order  number  or  article,  unless  the  time  is  summarized 
on  another  sheet  for  this  purpose. 

(8)  Is  the  labor  to  be  charged  to  the  product 
direct,  or  to  the  machine  or  process  under  a  ma- 
chine rate  method? 

In  either  case  a  time  unit  or  a  quantity  unit  may  be 
used  as  standard. 

If  the  labor  is  to  be  charged  to  the  product  or  the 
order  as  a  whole,  provision  may  be  made  on  the  reports 
for  summarizing  the  charges  of  the  different  parts,  though 
these  are  generally  recapitulated  on  separate  sheets. 
When  a  machine  rate  system  is  in  efifect,  the  name  or  order 
number  of  the  article,   machine,   or  process   chargeable 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS 


95 


should  be  shown.  It  is  often  desirable  to  have  a  space  on 
the  report  for  defective  work;  and  in  a  machine  rate  sys- 
tem the  reports  may  include  the  distribution  of  other 
charges,  thus  making  the  form  a  statement  of  the  costs 
of  a  particular  machine. 

The  whole  system  of  time  reports  should  be  devised 
with  certain  purposes  in  view.  It  should  be  possible  to 
compile  and  analyze  them  to  find  the  labor  cost  of  (i) 
any  order  as  a  whole,  or  any  part  of  it;  (2)  each  article 
of  a  class;  (3)  any  operation  or  process,  either  on  the 
basis  of  each  article  or  order,  or  per  unit  of  time. 

The  time  and  cost  devoted  to  production  should  be 
easily  separated  from  the  time  and  cost  of  non-productive 
labor.  Further,  the  arrangement  of  the  time  report 
should  be  designed,  to  facilitate  the  preparation  of  the 
pay-roll.  Occasionally  a  system  can  be  devised  whereby, 
as  already  suggested,  the  time  reports  turned  in  become 
the  pay-roll  without  any  further  recapitulation.  A  time 
report  where  quantities  are  shown  may  be  used  in  certain 
conditions  as  a  production  report,  which,  when  sum- 
marized by  departments,  will  give  the  production  report 
of  the  whole  department. 

Forms  of  Time  Reports 

A  number  of  time  report  forms  are  shown  in  the  pres- 
ent volume  (Forms  26-34),  not  with  the  intention  of 
standardizing  any  of  them,  but  in  order  that  the  different 
conditions  encountered  in  gathering  and  recording  labor 
cost  may  be  properly  covered,  and  in  order  to  suggest 
methods  of  gathering  labor  cost  data. 

Daily  Time  Report  (Form  26) 

This  is  a  daily  time  report,  intended  to  be  made  out 
by  the  workman.     It  is  used  where   the  labor  cost   is 


96  COST   ACCOUNTING 

charged  to  a  classification  of  product,  and  not  to  an 
order  number  or  process.  The  report  may  be  used  either 
for  day-work  or  piece-work,  in  factories  where  a  quan- 
tity of  the  same  article  is  produced. 

Daily  Time  Report  (Form  27) 

This  also  is  a  daily  time  report,  to  be  made  out  by 
the  workman.  It  is  intended  for  collating  the  cost  data 
according  to  department,  order  number  and  section  num- 
ber. Provision  is  made  for  showing  the  time  of  begin- 
ning and  finishing,  the  amount  of  production — defective 
and  good — and  the  amount  of  the  labor  cost. 

Weekly  Time  Report  (Form  28) 

This  is  a  weekly  time  report,  made  out  by  the  work- 
man, showing  the  quantity  produced  and  labor  cost  accord- 
ing to  department,  machine  number,  order  number  and 
operation.  Provision  is  made  for  showing  the  time  daily 
for  a  week,  and  the  total  time  at  the  end  of  the  week. 

Daily  Time  Report  (Form  29) 

This  form  is  a  daily  record  made  out  by  the  work- 
man, showing  the  quantity  produced  and  labor  cost  ac- 
cording to  department  and  order  number.  It  may  be  used 
either  in  day-work  or  piece-work.  The  special  feature  of 
this  form  is  its  provision  for  showing  the  material  cost  of 
the  production  as  turned  out  daily. 

Daily  Time  Record  (Form  30) 

This  design  is  intended  to  be  used  as  a  daily  record 
for  one  order  number  in  conjunction  with  a  time  stamp. 
While  the  operations  are  printed  on  the  card  to  save 
writing,  only  one  operation  can  be  registered  at  a  time. 
This  is  done  by  using  a  check  mark  for  the  operation 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     y; 

worked  on.  The  design  provides  for  showing  the  quan- 
tity, total  time,  rate  and  cost,  and  provision  is  also  made 
for  extra  wages  under  a  premium  system.  The  design 
may  also  be  used  where  the  labor  charge  is  made  against 
the  machine.. 

Daily  Time  Record  (Form  31) 

This  form  is  also  intended  to  be  used  as  a  daily  record 
for  one  order  number  or  operation  in  connection  with  a 
time  clock.  The  mechanism  of  the  clock,  when  the  card 
is  inserted,  punches  the  beginning  and  ending  time.  The 
record  also  provides  for  the  reading  of  the  elapsed  time 
without  calculation.  It  shows  the  order  number,  account 
number  and  amount  of  production,  as  well  as  the  time, 
rate  and  amount. 

Daily  Time  Record  (Form  32) 

This  design  provides  a  daily  record  of  the  time  spent 
on  an  operation,  the  starting  and  ending  time  being 
punched  in  the  columns  provided  on  the  left-hand  side  of 
the  card.  The  elapsed  time  must  be  calculated  and  en- 
tered on  the  face  of  the  card.  The  operation  should  be 
checked  ofif,  and  the  cost  should  show  according  to  de- 
partment or  order  number.  Provision  is  made  for  show- 
ing quantity  and  premium  rate. 

Under  the  caption  "Waiting  Time"  on  this  record  is 
shown  the  amount  of  lost  time  incurred  by  the  operator 
in  waiting  for  work,  due  to  either  accident  or  neglect  in 
the  operating  department. 

Daily  Time  Record  (Form  33)' 

This  record  is  to  be  made  out  daily  by  the  workman, 
and  provides  for  charging  his  time  against  a  machine, 
operation  or  process.     It  shows  the  total  machine  hours, 


98  COST    ACCOUNTING 

time  started  and  time  finished.     Provision  is  also  made 
for  the  premium  plan  of  paying  wages. 

Self-Figuring  Time  Card  (Forms  34a-c) 

Forms  34a-c  are  intended  for  use  in  small  plants,  or 
where  a  few  workmen  only  are  employed  on  a  certain 
job,  so  that  the  time  cost  may  be  summarized  on  the  card. 

A  daily  time  card  is  provided  for  each  workman  who 
renders  direct  labor  in  the  manufacture  of  a  product. 
This  is  in  the  form  of  a  disk,  representing  the  dial  of  a 
clock.  The  time  divisions  indicated  distinctively  are  the 
hour,  the  quarter  hour,  and  five-minute  intervals.  Each 
card  is  serially  numbered,  a  series  being  allotted  to  each 
class  of  product  or  article.  This  card  is  issued  to  the  work- 
man on  his  arrival  in  the  morning,  his  arriving  time 
being  punched  on  the  card  by  the  superintendent,  time- 
keeper, foreman  or  employer,  as  the  case  may  be.  On 
leaving  the  shop  for  any  reason  the  workman  must  pre- 
sent his  card  for  punching,  so  that  this  card  serves  the 
purpose  of  a  time  clock. 

The  most  thorough  records  are  obtained  when  every 
punch  mark  made  on  the  card  indicates  the  identity  of 
the  person  punching  it,  in  the  same  way  that  railway  con- 
ductors indicate  their  identity  by  their  punch  mark  on 
tickets. 

The  daily  time  card  is  intended  to  be  used  in  combina- 
tion with  the  self-figuring  cost  card.  This,  comprising 
also  a  job  card  in  disk  form,  is  only  slightly  larger  than 
the  time  card.  The  cost  card  accumulates  upon  it  the 
following  data: 

(i)  The  record   or  identity  of  each  workman 
who  renders  direct  labor  on  that  job. 

(2)  The  number  of  the  job  and  the  date. 


RECORDING  THE  MATERIAL  AND  LABOR  COSTS     99 

(3)  The  time  and  exact  money  cost  of  each 
workman's  labor  on  the  job.  As  many  as  eight  dif- 
ferent wage  rates  are  automatically  figured  on  the 
card,  so  that  the  cost  of  the  time  the  respective 
workers  spent  on  that  job  is  readily  determined. 

(4)  The  cost  of  materials  directly  used  on  the 
job. 

(5)  The  indirect  or  overhead  costs  properly 
chargeable  to  the  job. 

The  cost  card  has  a  series  of  concentric  circles,  each 
constituting  in  efifect  a  column  of  numbers.  These  are 
the  money  equivalents  of  the  time  divisions  or  intervals 
shown  on  the  time  card.  Each  circle  represents  twelve 
hours  of  labor  cost,  shown  in  five-minute  intervals,  and 
each  at  a  different  wage  rate. 

One  circle,  for  example,  is  for  a  $20.00  per  week  work- 
man, another  for  an  $18.00  man,  another  for  a  $16.00  man, 
and  so  on. 

For  illustration,  a  workman  upon  arrival  is  given  his 
time  card  with  a  perforation  showing  the  time.  He  is 
also  given  his  job  card,  which  indicates  his  job;  and  he 
sets  to  work — the  time  of  beginning  being  punched  on 
his  time  card.  When  he  has  finished  his  part  of  the  work 
on  that  job,  he  places  his  time  card  on  the  job  card  so 
that  his  "starting"  perforation  is  over  the  starting  point 
of  time  cost  in  his  circle  or  wage  level.  He  then  punches 
both  cards  at  the  spot  representing  his  finished  time.  By 
this  punch  he  has  indicated  the  number  of  cents'  worth 
of  his  labor  to  be  charged  to  that  job,  without  any  figur- 
ing. The  next  workman  at  the  same  wage  rate  who 
works  on  that  job,  follows  the  same  course  as  the  first, 
except  that  when  indicating  his  finishing  time  he  lays 
his  time  card  over  the  job  card,  so  that  through  his  "start- 


lOo  COST    ACCOUNTING 

ing"  perforation  he  sees  the  "stopping"  mark  of  the  pre- 
vious workman.  In  this  way  the  direct  labor  cost  is 
cumulatively  recorded  on  each  job.  If  the  rate  of  the 
second  man  is  different,  he  places  his  starting  punch  on 
the  starting  point  of  the  cost  card  as  before,  but  in  the 
circle  which  represents  his  rate  of  pay.  As  each  job  card 
of  this  standard  design  has  only  the  costs  of  twelve  hours 
of  work  for  each  of  eight  wage  rates,  more  than  one  job 
card  should  be  used  where  more  than  this  time  is  con- 
sumed. 

On  the  back  of  each  card  is  a  ruled  space  for  summing 
up  the  total  costs.  When  a  cost  card  has  been  filled,  the 
total  costs  it  contains  are  noted  on  a  fresh  card  in  the 
total  cost  space;  and  the  process  is  repeated  as  often  as  is 
necessary. 


CHAPTER  VIII 

COMPILING   THE   COST    DATA 

With  the  cost  data  once  at  hand,  as  found  in  the  vari- 
ous material  and  time  reports,  the  next  step  is  to  arrange 
and  summarize  this  information.  The  present  chapter 
shows  what  becomes  of  the  information  already  recorded, 
and  how  it  eventually  finds  its  way  into  the  factory  or 
operating  ledger. 

Records  and  Forms  Generally  Used 

The  records  listed  below  are  those  used  for  compiling 
the  cost  data.  They  are  discussed  in  the  order  in  which 
they  would  probably  be  put  into  operation,  rather  than  in 
the  order  in  which  they  are  listed.  It  will  be  noticed  that 
these  records  divide  themselves  into  two  groups;  first, 
those  serving  the  twofold  purpose  of  recording  financial 
transactions  and  also  of  furnishing  information  for  the 
cost  records;  and,  second,  those  dealing  almost  entirely 
with  data  relating  to  costs. 

(i)   Financial    Records 
Purchase  Journal 
Accounts  Payable  Voucher 
Register  of  Accounts  Payable 
Pay-Roll 

Billing  and  Shipping  Records 
Credit  Certificate 
Register  of  Sales  and  Costs 

lOI 


102  COST   ACCOUNTING 

(2)   Cost    Records 
Material  Received  Summary 
Report  of  Material  Delivered 
Analysis  of  Pay-Roll 
Statement  of  Factory  Expenditures 
Process  and  Machine  Cost  Records 
Production  Report  or  Production  Summary 
Defective  Work  Report 
Cost  Sheet 

Stock  Records — Part-Finished  Stock 
Stock  Records — Finished  Stock 
Cost  Journal 
Operating  or  Factory  Ledger 

Purchase  Journal  (Forms  5,  6) 

A  record  of  this  character,  sometimes  called  the  "Pur-  " 
chase  Analysis,"  is  frequently  used  in  the  simpler  cost 
systems. 

Form  5  should  be  used  only  where  an  account  is  kept 
of  the  purchases  according  to  classification  of  material  or 
product.  The  form  is  suitable  where  a  proof  system  for 
estimating  costs  is  in  use. 

Form  6  is  an  analysis  of  the  purchases  and  expenses, 
and  should  be  employed  where  a  voucher  system  is  not 
in  use.  Where  this  record  is  introduced,  accounts  are 
opened  in  the  general  ledger  for  the  various  classifications 
shown.  At  the  end  of  the  month  the  "Total  Amount" 
column  is  credited  to  the  Accounts  Payable  account,  and 
the  total  of  the  various  columns  up  to  and  including 
administrative  expenses  is  charged  to  the  debit  of  the  re- 
spective accounts. 

The  column  "Sundry  Accounts"  is  intended  for  classi- 
fications not  otherwise  provided  for.    These  accounts  are 


COMPILING   THE   COST   DATA 


[03 


either  posted  individually  to  the  debit  of  the  extra  classi- 
fications, or  they  are  summarized  and  so  posted  at  the 
end  of  the  month. 

Accounts  Payable  Voucher  (Forms  7,  8) 

The  "Accounts  Payable  Voucher"  is  a  form  used  for 
listing  and  classifying  all  expenditures  incurred,  whether 
for  material,  labor,  indirect  expenses,  selling  expenses  and 
administrative  expenses,  or  for  additions  to  the  plant, 
furniture  and  fixtures,  etc.  The  form  provides  for  record- 
ing the  number  of  voucher,  name  of  creditor,  date,  amount 
and  classification  of  the  items  contained  in  the  invoices 
attached  to  the  voucher,  and  also  for  information  as  to 
the  payment  of  each;  as  date,  bank  and  check  number, 
approval,  etc.  In  order  to  facilitate  the  making  of  proper 
classifications,  and  their  entry  in  the  accounts  payable 
register,  it  is  well  to  have  the  names  of  the  accounts 
which  are  most  frequently  affected  printed  upon  the 
voucher.  This  also  saves  the  time  involved  in  writing  in  the 
names  of  the  accounts  every  time  a  voucher  is  prepared. 

The  invoices  from  the  creditors  are  attached  to  the 
accounts  payable  voucher  and  also  copies  of  the  purchase 
requisition,  purchase  order,  material  received  sheets,  and 
sometimes  the  cancelled  check,  when  this  is  returned  from 
the  bank.  Thus  it  will  be  seen  that  the  voucher  pro- 
vides for  a  complete  history  of  the  purchase  transaction. 
A  separate  voucher  should  be  prepared  for  each  creditor 
from  whom  purchases  are  made,  but  in  case  several  trans- 
actions with  the  same  creditor  have  occurred  during  the 
month,  and  the  account  is  paid  monthly,  several  invoices 
may  be  attached  to  the  same  voucher. 

When  the  pay-roll  is  distributed  through  the  accounts 
payable  register,  a  voucher  should  be  prepared  for  the  pay- 
roll. 


I04 


COST   ACCOUNTING 


The  information  under  the  caption  "Operating  or  Fac- 
tory Ledger"  should  be  posted  to  the  accounts  in  the 
factory  ledger  under  the  proper  classification. 

Register  of  Accounts  Payable  (Form  9) 

The  "Register  of  Accounts  Payable"  is  the  record  in 
which  the  accounts  payable  vouchers  are  entered  and  sum- 
marized. The  vouchers  are  usually  entered  in  numerical 
order  according  to  date.  The  register  of  accounts  pay- 
able is  sometimes  known  as  "Voucher  Register,"  "Ac- 
counts Payable  Register,"  "Record  of  Audited  Vouchers," 
and  "Creditors'  Record." 

The  record  generally  provides  columns  for  recording 
the  following  information: 

Date,  number  of  voucher,  name  of  creditor,  amount 
payable,  and  distribution  of  the  amount  into  the  columns 
provided  for  the  classification,  as  shown  by  the  accounts 
payable  voucher.  The  record  also  provides  columns  for 
showing  the  information  relating  to  the  payment  of  the 
voucher. 

One  of  the  principal  reasons  for  the  use  of  a  register 
of  accounts  payable  is  the  fact  that  it  dispenses  with  the 
necessity  of  keeping  detailed  ledger  accounts  with  the 
creditors,  thereby  saving  considerable  time. 

At  the  end  of  the  month  the  total  of  the  column 
headed  "Vouchers  Payable"  is  posted  to  the  credit  of 
that  account  in  the  general  ledger.  The  totals  of  the 
columns  under  the  captions  "Operating  Accounts"  and 
"Property  Accounts"  are  posted  to  the  debit  of  the  re- 
spective accounts  in  the  general  ledger. 

The  vouchers  payable  account  is  the  controlling  account 
of  the  register  of  accounts  payable. 

Under  the  caption  "Miscellaneous  Accounts"  will  be 
entered  the  items  which  are  not  provided  for  in  the  other 


I 


COMPILING  THE  COST   DATA 


to5 


classifications,  and  these  will  either  be  posted  individually 
to  the  debit  of  the  account  affected,  or  be  summarized 
at  the  end  of  the  month  for  posting. 

Material  Received  Summary 

A  summary  is  sometimes  prepared  from  the  material 
received  sheets,  and  may  be  used  where  different  ship- 
ments of  the  same  class  of  raw  material  have  been  re- 
ceived, the  price  remaining  the  same.  The  posting  of 
material  received,  when  a  summary  is  not  used,  is  taken 
from  the  material  received  record.  An  entry  is  made  on 
the  accounts  payable  voucher  for  material  received,  ac- 
cording to  classification,  and  it  is  also  entered  in  the  "Fac- 
tory" column  in  the  register  of  accounts  payable.  An 
entry  is  also  made  of  the  material  received  on  the  debit 
side  of  the  raw  stock  record.  In  case  the  material  is 
intended  only  for  a  special  order,  it  should  be  entered  on 
the  cost  record  of  that  order,  and  then  need  not  neces- 
sarily appear  on  the  raw  stock  record. 

Report  of  Material  Delivered  (Forms  24,  25) 

If  the  postings  are  made  daily  from  the  material 
requisitions,  no  summary  of  material  delivered  to  the 
operating  departments  is  needed,  but  where  the  cost  of 
the  material  does  not  fluctuate,  it  may  be  of  advantage 
to  summarize  weekly,  or  at  the  end  of  the  cost  period. 

In  many  kinds  of  manufacturing,  differences  occur  in 
the  cost  of  the  raw  material  without  any  corresponding 
difference  in  the  quality  of  the  material,  as  in  the  buying 
of  cotton-seed  oil,  or  hops.  In  such  cases,  the  average  cost  of 
material  for  the  cost  period  is  generally  taken  and  treated  as 
if  it  were  the  real  cost.  Unless  this  is  done,  or  unless  the 
price  remains  stationary,  the  summary  of  material  requisi- 
tions had  better  be  omitted,  as  its  advantage  lies  in  collecting 


Io6  COST   ACCOUNTING 

many  charges  of  a  similar  kind  into  one  general  charge 
for  posting. 

Form  24  is  intended  to  classify  the  material  used  ac- 
cording to  the  selling  classifications  of  the  product  only, 
and  is  especially  adapted  for  a  system  in  which  estimated 
costs  must  be  proved. 

Departments  A,  B  and  C  represent,  on  this  form, 
operating  departments  of  the  plant.  The  captions  i,  2 
and  3,  under  the  departments,  represent  the  selling 
classifications. 

Form  25  is  an  ordinary  record  for  the  recapitulation  of 
material  requisitions,  according  to  order  number,  product 
chargeable,  article,  quantity  and  value.  The  material  de- 
livered to  operating  departments  is  credited  on  the  raw 
stock  records  and  charged  under  the  caption  "Material" 
to  the  proper  "Work  in  Process"  account  in  the  factory 
ledger. 

Partly-finished  material  taken  out  of  stock  is  also 
posted  to  the  cost  records  according  to  the  classification 
provided  for  by  the  system  in  use,  which  may  be  order, 
article,  job,  section  or  process. 

Pay-Roll  (Forms  37-40) 

The  pay-roll  is  prepared  from  the  time  reports  for  the 
purpose  of  summarizing  and  distributing  the  amount  paid 
to  each  employee.  The  type  of  form  selected  depends  on 
the  class  of  system  to  be  used,  and  the  information  desired. 

Form  37  represents  the  factory  pay-roll  for  a  week, 
with  all  the  operating  departments  on  one  sheet,  the 
labor  being  classified  in  the  operating  departments  into 
"Direct"  and  "Indirect."  Provision  is  also  made  for 
special  labor,  as  in  the  case  of  a  cupola  where  a  foundry 
is  one  of  the  operating  departments.  The  labor  in  con- 
nection with  the  cupola  is  all  direct,  as  the  cupola  is  a 


COMPILING   THE   COST    DATA 


107 


'  process  cost.  The  labor  cost  of  the  power  department  is 
also  provided  for,  and  as  the  distribution  is  made  from 
the  total  cost,  all  the  labor  is  regarded  as  direct  in  that 
department.  Provision  is  made  for  salaries  of  of^cers,  of 
office  clerks,  foremen,  supervision,  shipping,  and  any  other 
clerk  hire.  While  the  form  is  very  complete,  there  are 
many  cases  where  it  will  not  be  practicable  to  use  it  in 
its  entirety,  because  of  the  fact  that  salaries  are  combined 
with  the  workmen's  pay-roll  on  the  one  record. 

Form  38  provides  only  for  the  pay-roll  according  to 
department,  dividing  the  labor  into  direct,  supervision  and 
office  salary,  the  direct  labor  being  entered  only  in  the 
operating  departments. 

Form  39  provides  for  recapitulating  the  labor  accord- 
ing to  department,  direct,  indirect  and  supervision. 

The  individual  time  records  may  be  posted  daily  on 
Form  40,  just  as  on  Form  37;  and  the  total  amount  of  pay 
is  shown  at  the  end  of  the  pay  period.  The  form  pro- 
vides for  classifying  the  labor  according  to  department 
only,  no  distinction  being  made  between  direct  and  in- 
direct labor. 

The  pay-roll  may  be  entered  in  different  ways: 

( 1 )  It  may  be  attached  to  an  accounts  payable  voucher, 
upon  w^hich  it  will  be  classified  for  charging  to  the  various 
factory  accounts  as  well  as  to  administrative  expense 
accounts.  The  accounts  payable  voucher  is  then  entered 
in  the  register  of  accounts  payable,  where  it  appears  as 
a  credit  to  the  Pay-Roll  account,  a  charge  being  made  to 
the  factory  ledger  and  other  expense  accounts.  The  entry 
is  made  from  the  accounts  payable  voucher  to  the  various 
department  accounts  in  the  factory  ledger,  and  also  to 
the  various  cost  records  under  the  caption  "Direct  and 
Indirect  Labor." 

(2)  When  the  pay-roll  is  not  attached  to  the  accounts 


lo8  COST   ACCOUNTING 

payable  voucher,  but  entered  directly  in  the  cash  book 
and  charged  to  a  Pay-Roll  account  in  the  general  ledger, 
an  entry  should  be  made  distributing  the  Pay-Roll  ac- 
count, and  charging  the  various  departments,  processes, 
or  articles  with  their  proper  proportion  of  direct  labor. 
The  indirect  labor  is  charged  to  an  indirect  labor  account, 
in  total,  or  under  whatever  classifications  the  division  of 
the  labor  accounts  may  require. 

Analysis  of  Pay-Roll  (Forms  35,  36) 

The  "Analysis  of  Pay-Roll"  is  for  the  purpose  of  re- 
capitulating the  labor  charges  into  classifications  not  pro- 
vided for  on  the  regular  pay-roll  form,  or  for  those  cases 
where  the  pay-roll  form  is  not  suitable  for  an  analysis. 

The  information  to  be  entered  upon  the  analysis  will 
depend  both  on  the  class  of  system  used  and  the  type  of 
pay-roll.  The  pay-roll  may  be  analyzed  in  various  ways 
for  cost  purposes,  viz: 

(i)  According  to  departments,  operations  and 
processes 

(2)  According  to  machine  costs 

(3)  According  to  classifications  of  product 

Form  35  represents  a  method  of  recapitulating  the 
pay-roll  for  a  week  according  to  department,  the  direct 
labor  cost  being  charged  to  a  classification  of  product 
especially  adapted  to  a  departmental  system.  Provision 
is  made  also  for  the  indirect  labor.  Under  certain  condi- 
tions this  form  may  be  used  as  a  pay-roll  as  well  as  an 
analysis. 

Form  36  is  not  intended  for  pay-roll  purposes,  but 
for  making  a  recapitulation  of  all  workmen's  time,  show- 
ing the  total  number  of  hours  chargeable  to  an  operation 


\ 


COMPILING   THE   COST   DATA 


109 


or  order.  This  form  may  be  used  to  ascertain  the  total 
number  of  hours  of  the  machines  or  equipment,  for  the 
distribution  of  either  machine  charges  or  indirect  ex- 
penses, on  the  basis  of  production  hours. 

Statement  of  Factory  Expenditures  (Forms  41-44) 

Indirect  expenses  are  so  general  in  character  and  arise 
from  such  divergent  sources  that  it  is  good  policy  to  sum- 
marize them  upon  a  statement  of  factory  expenditures, 
which  may  be  used  as  a  summarized  statement  of  factory 
accounts  or  as  a  source  from  which  the  distribution  of  the 
general  operating  expenses  may  be  made.  A  statement  of 
factory  expenditures  is  given,  with  the  figures  entered,  to 
illustrate  its  use  more  clearly. 

Form  41.  A  form  of  this  character  may  be  used  for 
analyzing  either  factory  expenditures,  or  selling  and 
administrative  expenses.  The  items  composing  the  ex- 
penditures may  be  entered  across  the  top  of  the  form, 
with  the  date  and  voucher  number  at  the  left-hand  side; 
or  at  the  end  of  the  period  the  accounts  may  be  entered 
at  the  left-hand  side  running  down,  and  the  months 
across  the  top,  thereby  making  a  comparative  statement 
of  expenditures. 

Form  42.  This  form  is  used  to  analyze  factory  expendi- 
tures only,  and  is  intended  for  distributing  the  indirect 
expenses  over  the  product  as  a  whole  and  not  by  de- 
partment. The  record  provides  for  showing  information 
in  comparative  form,  and  provision  is  made  to  show 
the  inventory  at  the  beginning  of  the  period,  as  well  as 
all  direct  and  indirect  charges,  from  which  the  cost  of 
the  goods  sold  is  deducted,  leaving  the  inventory  at  the 
end  of  the  period  comprising  raw  material,  goods  m 
process  and  finished  stock  on  hand. 

Form  43.  This  is  a  monthly  statement  taken  from 


no  COST    ACCOUNTING 

the  factory  ledger,  and  may  properly  be  called  an  "An- 
alysis of  Manufacturing  Charges."  It  represents  the 
operations  of  one  month  only.  The  titles  of  the  accounts 
are  entered  in  the  column  at  the  left  of  the  form,  and  a 
column  is  provided  for  each  operating  department. 

The  monthly  statement,  when  taken  from  the  factory 
ledger,  will  show  the  material  and  labor  charged  to  each 
operating  department,  and  an  analysis  of  the  depart- 
mental expenses.  Columns  are  ruled  on  the  lower  part 
of  the  form  for  operations  of  the  storeroom,  for  general 
factory  expenses,  and  for  the  distribution  of  the  same. 

The  chief  purpose  of  this  form,  outside  its  direct  in- 
formation, which  is  valuable  to  the  management,  is  to 
supply  data  from  which  may  be  determined  the  per- 
centage to  be  used  in  distributing  the  indirect  expenses 
on  the  cost  of  all  articles  as  entered  on  the  cost  record. 

The  information  shown  under  the  caption  "Direct" 
represents  the  productive  labor  of  each  department,  as 
well  as  the  material  used;  whereas  all  the  items  appearing 
under  the  caption  "Indirect  "  represent  expenses  charge- 
able directly  to  each  of  these  departments,  except  the 
account  "General  Operating  Expenses,"  which  contains 
such  items  as  appear  in  the  lower  section  of  the  form  and 
do  not  relate  to  any  particular  department.  These  ex- 
penses may  be  prorated  over  all  the  departments  on  the 
basis  of  the  amount  of  direct  labor  charged  to  each  de- 
partment, by  multiplying  this  amount  by  the  percentage 
obtained  from  dividing  the  total  amount  of  the  operating 
expenses  by  the  direct  labor.  The  department  accounts 
will  then  be  charged  with  all  the  indirect  expenses,  in- 
cluding the  general  operating  expenses;  and  the  per- 
centage shown  will  represent  the  proper  amount  to  be 
added  for  indirect  expenses  to  the  prime  cost  of  the 
articles  manufactured  in  any  one  of  these  departments. 


COMPILING   THE   COST   DATA  HI 

In  the  lower  left-hand  section  of  this  form  the  store- 
room operations  are  indicated,  i.  c,  the  value  of  the  in- 
ventory at  the  beginning  of  the  period,  the  purchases 
during  the  period,  and  the  material  delivered  to  operating 
departments  during  the  month.  This  material  delivered 
is  recorded  in  the  upper  section  of  the  statement  under 
the  caption  "Direct,"  opposite  the  account  ''Material/' 
The  balance  shows  the  inventory  of  raw  material  on  hand 
at  the  end  of  the  month. 

The  only  important  difference  between  Form  43  and 
Form  44  is  that  the  latter  is  made  in  comparative  form. 
The  statements  of  factory  expenditures  as  shown  by  these 
forms  are  of  added  value  to  the  management  when  used 
as  a  monthly  comparative  record  of  the  indirect  expenses 
in  each  department. 

Process  and  Machine  Cost  Records  (Forms  45,  46) 

The  designs  illustrated  are  used  only  in  a  machine 
or  process  cost  system,  provision  being  made  for  the  dis- 
tribution of  power  and  machine  costs.  A  detailed  ex- 
planation of  these  records  will  be  found  in  Chapter  XV. 

Production  Report  or  Production  Summary  (Forms  47-50) 

There  are  many  kinds  of  production  reports  to  meet 
the  demands  of  widely  different  industries.  In  some  cases 
time  reports  are  used  for  reporting  production,  as  ex- 
plained in  Chapter  VII. 

The  production  report  is  valuable  for  indicating  the 
efficiency  of  various  departments.  The  forms  should  be 
so  filed  that  comparison  between  them  will  be  easy,  and 
discrepancies  will  be  noted  at  once.  In  this  way  the  effect 
of  any  change  of  conditions  or  methods  can  be  accurately 
gauged.  This  double  service  makes  the  production  re- 
port one  of  the  most  important  forms  of  a  system. 


112 


COST    ACCOUNTING 


Some  of  the  purposes  for  which  production  reports 
may  be  used  are  as  follows: 

(i)   Reporting  production  only 

(2)  Reporting  production  and  indicating  on  the 
report  the  amount  of  defective  work 

(3)  Indicating  the  cost  of  material 

(4)  Showing  the  labor  and  material  cost 

The  production  report  is  used  in  many  forms.  Those 
shown  in  the  present  volume  are  typical. 

Form  47.  This  form  is  intended  to  report  the  pro- 
duction by  department  and  order  number  and  to  show 
the  total  produced,  the  amount  defective  and  the  amount 
good.     The  operation  may  also  be  indicated,  if  desired. 

Form  48.  This  form  represents  a  plan  for  gathering 
the  material  and  labor  cost  on  a  production  report,  but 
does  not  provide  for  indirect  charges  unless  they  are  in- 
cluded in  the  machine  rate,  in  which  case  they  would  be 
entered  under  the  column  "Process  or  Machine  Costs." 

The  form  is  intended  to  be  used  principally  in  a  process 
or  machine  cost  system,  and  the  time  of  all  workmen  on 
one  operation  may  be  recapitulated  under  the  caption 
"Time,"  according  to  the  hours  of  the  workmen,  or  the 
machine  hours,  depending  on  the  system  in  use. 

Form  49.  This  form  is  a  monthly  report,  and  pro- 
vides for  recording  the  production  by  departments  daily, 
according  to  the  classification  of  product.  It  is  espe- 
cially adapted  to  a  departmental  system.  Provision  is 
made  for  costing  the  material  on  the  report.  When  this 
is  done  the  rate  to  be  used  may  be  obtained  from  the 
bill  of  material. 

The  report  may  be  made  out  by  the  foreman  of  a 
department,  or  may  be  compiled  from  time  records  show- 


COMPILING   THE   COST   DATA 


113 


ing  production,  or  from  production  reports  which  show 
production  only. 

Form  50.  This  form  is  a  monthly  report  intended  to 
record  the  production  according  to  department,  opera- 
tion, and  order  number,  if  one  is  used.  The  columns 
I  to  31  represent  the  days  in  a  month,  and  are  intended 
for  entering  the  total  production  each  day,  according  to 
the  operation.  Provision  is  made  on  the  right-hand  side 
of  the  form  for  costing  the  material,  the  necessary  data 
being  taken  from  a  bill  of  material  or  material  requisi- 
tion. The  information  contained  on  the  production 
reports  is  entered  on  the  cost  records. 

Defective  Work  Report  (Form  51) 

It  is  more  convenient  sometimes  to  have  separate 
forms  for  reporting  or  summarizing  defective  work  than 
to  have  columns  on  the  regular  production  or  time  re- 
ports. The  form  is  valuable  as  an  organization  and 
efficiency  report.  A  certain  loss  from  defective  work  is 
almost  sure  to  occur;  and  the  only  way  to  reduce  this 
to  a  minimum  is  to  have  definite  reports  showing  when, 
where  and  why  the  defect  occurred. 

The  mere  fact  that  all  defective  work  is  reported  to 
the  management  will  tend  to  minimize  this  loss.  Also, 
if  there  is  rivalry  between  the  operating  departments  as 
to  which  can  make  the  best  record,  and  the  foremen 
of  all  the  operating  departments  receive  copies  of  these 
reports,  it  will  tend  strongly  to  lower  losses  on  defective 
work. 

The  cost  of  defective  work  may  be  charged  against  the 
department,  job,  order,  or  article,  or  may  go  into  a  special 
account  and  be  included  in  the  indirect  expenses.  If  it 
is  possible  to  use  some  of  the  material  again,  as  in  the 
case  of  defective  castings,  it  should  be  taken  back  into 


114  COST   ACCOUNTING 

Stock  at  its  scrap  value;  and  the  difference  between  the 
scrap  value  and  its  original  cost  may  be  charged  as  stated 
above.  The  cost  of  defective  work  should  include  its 
proper  proportion  of  the  indirect  expenses. 

Cost  Sheets  (Forms  52-55) 

All  cost  data,  in  whatever  form  they  may  have  been 
gathered,  must  be  finally  entered  on  a  form  showing  the 
complete  costs  of  production.  It  would  be  difficult  to 
name  any  form  which  could  be  called  a  standard  form 
for  this  purpose,  owing  to  the  many  different  manufactur- 
ing industries,  the  varying  conditions  existing  in  plants, 
and  the  different  types  of  cost  systems. 

The  forms  presented  here  merely  illustrate  the  methods 
by  which  cost  data  may  be  entered  to  show  final  results. 
Indeed,  special  forms  are  not  needed  for  the  purpose, 
as  complete  costs  may  be  shown  on  production  orders 
(especially  where  the  production  order  represents  a  cus- 
tomer's order),  or  they  may  be  compiled  on  a  production 
report.     Both  of  these  plans  are  illustrated  in  this  book. 

In  many  cases  the  cost  sheet  is  used  as  a  cost  record 
only;  and  cost  data  from  all  sources  are  compiled  upon 
it.  The  best  plan  to  pursue  in  designing  a  cost  record 
will  depend,  therefore,  on  the  manufacturing  conditions 
and  the  type  of  system  in  use  or  to  be  used. 

Form  52.  This  is  not  a  record  of  costs  as  used  in 
a  regular  cost  system,  since  it  only  records  estimated 
costs.  It  is  therefore  adapted  only  to  one  of  the  systems 
where  costs  are  estimated  in  advance  and  these  estimates 
are  checked  by  results. 

Form  53.  This  form  is  intended  to  show  the  cost 
per  article  where  a  process  system  is  used.  The  quantity 
produced  and  the  time  of  the  workmen  are  entered  accord- 
ing to  department,  under  the  captions  i,  2,  3,  4  and  5. 


COMPILING   THE   COST   DATA  II5 

^'  The  process  rate  per  hour  is  ascertained  and  the  process 
cost  calculated.  The  material  cost  is  then  entered,  and  a 
summary  of  this  information  shows  the  total  cost. 

Form  54.  A  form  of  this  character  may  be  termed  a 
"Progressive  Cost  Record,"  inasmuch  as  the  costs  are 
carried  from  department  to  department  until  the  final 
costs  are  obtained.  A  separate  sheet  is  used  for  each 
department.  In  the  first  department  no  record  is  made 
under  the  caption  "Previous  Operations,"  but  all  the 
other  columns  are  used,  the  material  and  labor  costs  and 
the  information  under  "Indirect"  coming  from  the  forms 
containing  the  required  information,  according  to  the 
system  in  use.  The  production  of  the  department  is 
shown  under  "Quantity,"  and  the  total  cost  under  the 
caption  "Total."  When  work  progresses  to  the  next 
department,  the  record  will  show  the  cost  of  previous 
operations  as  taken  from  the  "Total"  column  of  the  pre- 
vious department's  report. 

Form  55.  This  record  is  intended  to  be  used  where  all 
cost  data  are  entered  on  other  forms  and  then  trans- 
ferred to  and  combined  with  this  record.  In  addition,  the 
record  is  used  for  showing  the  number  of  machines  in  use 
in  connection  with  production,  and  the  average  production 
per  machine,  this  information  being  only  of  a  statistical 
character. 

The  postings  from  the  cost  sheets  to  other  records 
will  depend  entirely  on  what  type  of  system  is  in  use. 
Wherever  a  stock  record  is  kept,  an  entry  should  be  made 
to  "Part-Finished"  or  "Finished"  stock,  according  to  the 
proper  classification.  In  a  system  where  accounts  are 
kept  representing  goods  in  process  of  manufacture, 
whether  it  be  in  a  factory  ledger  or  the  general  ledger, 
the  totals,  as  compiled  on  the  cost  sheets,  are  credited 
to  the  proper  classification  in  those  ledgers,   so  that  the 


Il6  COST   ACCOUNTING 

balance  of  the  accounts  affected  will  show  the  value  of  the 
goods  in  process  of  manufacture. 

Record  for  Part-Finished  and  Finished  Stock  (Forms  56-59) 

The  functions  and  importance  of  stock  records  were 
discussed  under  the  head  of  raw  material  stock  records. 
The  present  records  form  a  part  of  the  stock  system  in  a 
factory.  The  regular  forms  for  finished  stock  may  be 
used,  with  the  necessary  minor  changes  in  the  headings, 
for  part-finished  stock  records. 

Form  56  illustrates  a  simple  method  of  keeping  stock 
records.  The  form  may  be  used  for  finished  or  part- 
finished  stock.  The  caption  ''Used"  on  this  design  is 
intended  to  cover  part-finished  stock  taken  back  into 
process  of  manufacture,  either  for  completion  or  for 
assembling  purposes. 

Form  57  carries  out  the  same  idea  as  Form  56,  ex- 
cept that  the  word  "Deliveries"  is  substituted  for  the 
word  "Used."  The  form  is  also  more  complete  for  post- 
ing purposes. 

Form  58.  This  might  be  termed  an  "Analytical  Rec- 
ord of  the  Finished  Product";  and  it  is  used  where  it  is 
convenient  to  keep  a  record  on  one  sheet  of  a  number 
of  different  sizes  of  the  same  article.  Provision  is  made 
only  for  quantity  produced,  quantity  of  orders  received, 
and  the  quantity  shipped. 

Wherever  a  form  of  this  character  is  used,  and  it  is 
desired  to  carry  the  value  of  the  finished  stock  on  the 
records,  it  will  be  necessary  to  use  one  of  the  regular  stock 
records  showing  the  value.  In  this  case,  the  regular 
record  would  provide  only  for  the  article,  independent  of 
the  sizes,  the  record  showing  sizes  being  merely  an  an- 
alyzed statement  of  sizes  in  stock. 

Form  59.  This  record,  wherever  it  can  be  used,  makes 


COMPILING  THE   COST   DATA  II7 

about  as  complete  a  stock  record  as  could  be  desired. 
The  particular  features  of  interest  are  the  columns  for 
orders  received,  orders  cancelled,  and  unfilled  orders  on 
hand. 

The  entries  on  this  finished  stock  card,  costing  the 
production,  are  taken  from  the  cost  record.  When  goods 
are  sold,  the  finished  stock  card  is  credited  from  the  bill- 
ing and  shipping  records,  and  when  part-finished  stock 
is  taken  out,  from  either  the  material  requisition  or  bill 
of  material. 

Billing  and  Shipping  Records  (Form  62) 

It  is  frequently  possible  to  combine  the  records  for 
billing,  shipping  and  costing  the  sales.  For  instance,  an 
order  is  received  and  accepted.  The  billing  clerk  then 
makes  out  three  copies  of  the  bill.  The  original  goes  to 
the  customer,  the  duplicate  goes  to  the  shipping  clerk — 
serving  as  a  shipping  order — and  the  triplicate  remains  in 
the  office  for  entry  on  the  register  of  sales  and  costs.  It 
will  be  noticed  that  the  triplicate  provides  extra  columns 
for  recording  the  information  applying  to  the  costs,  such 
as  rate  and  amount  of  cost,  the  number  and  date  of  invoice, 
the  name  and  address  of  customer,  shipping  memoranda, 
quantity,  amount,  etc. 

Only  one  form  of  billing  record  is  illustrated  here, 
and  this  is  presented  for  the  one  purpose  of  illustrating 
the  accounting  procedure  involved.  When  a  form  is  to 
be  devised,  its  design  will  depend  entirely  on  the  condi- 
tions of  manufacturing  and  selling,  and  the  system  in 
use. 

The  information  on  the  triplicate  copy,  under  the  cap- 
tion "Cost  Price,"  is  taken  either  from  the  stock  record 
or  cost  record  showing  the  cost  of  the  articles  that  are 
to  be  shipped,  and  the  entry  according  to  selling  price 


Il8  COST   ACCOUNTING 

and  cost  price  is  made  on  the  register  of  sales  and  costs, 
according  to  the  classification  provided  for  in  that  record. 

Credit  Certificate  (Form  63) 

This  is  intended  for  recording  the  allowances  to  cus- 
tomers either  for  returned  goods  or  for  a  special  claim. 
In  case  of  returned  goods,  the  information  will  be  taken 
from  the  material  received  record,  and  in  case  of  a  special 
allowance,  from  correspondence.  In  the  case  of  returned 
merchandise,  the  information  under  the  caption  "Selling 
Price"  should  be  taken  from  the  customer's  record,  and 
the  information  under  the  caption  "Cost  Price,"  from 
the  cost  or  finished  stock  record. 

The  original  copy  is  sent  to  the  customer,  showing 
the  amount  of  credit  allowed;  and  the  entries  in  the  books 
are  made  from  the  duplicate  copy  which  is  placed  on  file. 
The  amount  of  the  selling  price  and  cost  price  is  entered 
on  a  separate  sheet  in  the  register  of  sales  and  costs, 
according  to  the  classification  of  the  sales,  in  the  same 
manner  as  the  sales  were  entered.  In  case  a  special  allow- 
ance is  made,  the  entry  should  be  made  through  the 
journal,  the  customer  being  credited  and  the  proper 
account  being  charged. 

Register  of  Sales  and  Costs  (Forms  64,  65) 

When  the  sales  are  not  classified  as  to  departments  or 
article,  the  sales  and  costs  may  be  summarized  by  means 
of  an  adding  machine;  but  if  the  sales  are  classified  to  any 
extent,  it  is  well  to  use  a  register  of  sales  and  costs  for 
the  purpose  of  recording  the  information,  this  being  entered 
daily  in  total  or  in  detail.  It  may  be  necessary  to  have  a 
separate  sheet  for  each  department. 

A  register  of  sales  and  costs  may  provide  for  record- 
ing the  date,  the  number,  the  name  and  address  of  cus- 


i 


COMPILING   THE   COST   DATA 


119 


tomer,  amount  and  cost  of  sales,  and  be  provided  with 
columns  showing  the  classification  as  to  the  product  or 
department.  In  addition,  the  total  amount  of  the  sale 
column,  or  accounts  receivable  column,  may  be  divided 
to  show  the  classification  of  the  customers'  accounts. 

There  are  two  plans  in  general  use  for  keeping  a 
register  of  sales  and  costs: 

(i)  Providing  for  the  classification  of  the  sales 
according  to  sales  and  costs  for  posting  to  the 
department  and  controlHng  accounts  only,  this 
method  being  used  where  the  posting  to  the  cus- 
tomer is  made  from  the  bill. 

(2)  Providing  for  the  same  information  so  far 
as  the  division  of  the  sales  and  costs  into  depart- 
ments is  concerned,  but  providing  extra  columns 
for  entering  each  bill  according  to  name,  terms, 
etc.,  all  postings  being  made  from  the  register. 

The  choice  of  a  plan  will  depend  on  the  general  bill- 
ing system  in  use. 

Form  64  illustrates  the  second  plan,  whereby  the 
customers'  accounts  are  entered  and  distributed,  accord- 
ing to  departments,  into  sales  and  cost  of  sales.  Provi- 
sion is  also  made  on  this  form  for  showing  the  gross 
profit  on  each  order.  The  customers'  accounts  are 
charged  and  at  the  end  of  the  month  the  total  of  the 
accounts  receivable  column  is  debited  to  that  account  in 
the  general  ledger.  The  totals  of  the  sales  columns  are 
credited  to  the  department  sales  accounts  in  the  general 
ledger,  and  the  totals  of  the  cost  of  sales  columns  are 
charged  to  the  department  sales  accounts.  Where  a  con- 
trolling account  is  kept  of  the  finished  stock,  the  total 
of  the  cost  of  sales  columns  is  credited  to  that  account. 


120  COST   ACCOUNTING 

Form  65  is  a  special  form  for  the  purpose  of  analyzing 
sales  according  to  material,  labor  and  indirect,  and  is 
intended  to  be  used  only  in  a  system  for  proving  esti- 
mated costs. 

Cost  Journal 

A  "Cost  Journal"  is  practically  the  same  as  the 
ordinary  two-column  journal,  provision  being  made  for  the 
date,  folio  for  reference  purposes,  a  wide  column  for 
explanations,  and  two  money  columns,  one  for  the  debits 
and  the  other  for  the  credits. 

Its  function  is  to  record  and  arrange  the  information 
obtained  from  the  original  factory  records  for  posting  to 
the  accounts  in  the  operating  or  factory  ledger. 

It  is  not  always  necessary  to  use  a  cost  journal  as  a 
posting  medium,  since  the  postings  may  often  be  made 
from  the  original  factory  records. 

Operating  or  Factory  Ledger 

The  "Factory  Ledger"  is  that  record  in  cost  account- 
ing which  arranges  and  classifies  the  information  con- 
tained in  the  original  factory  records. 

The  ruling  of  the  factory  ledger  will  depend  to  some 
extent  upon  the  type  of  system  in  use.  In  some  cases 
the  ordinary  ledger  ruling  is  quite  sufificient,  while  in 
other  cases  columns  should  be  added  for  showing  a  de- 
tailed analysis. 

The  accounts  usually  found  in  the  "Factory  Ledger" 
are: 

( 1 )  Raw  Material  and  Supplies  Account 

(2)  Labor  Account 

(3)  Indirect  Expense  Account 

(4)  Work  in  Process  Account 

(5)  Part-Finished  Stock  Account 


COMPILING  THE   COST    DATA  121 

(6)  Finished  Stock  Account 

(7)  General  or  Private  Ledger  Account 

(i)  Raw  Material  and  Supplies  Account 

This  account  shows  in  total  the  information  contained 
In  detail  in  the  raw  material  record.  It  is  debited  with 
all  receipts  of  raw  material  and  supplies,  and  credited 
with  all  deliveries  to  operating  departments,  and  with 
any  material  returned  to  the  creditor.  Therefore  the 
balance  at  the  end  of  the  cost  period  should  agree  with 
the  total  of  the  balances  represented  by  the  detailed 
records  of  raw  material  stock,  thus  creating  a  control 
and  check  upon  the  work  and  information  contained  in 
the  detailed  stock  records. 

(2)  Labor  Account 

j  The  amount  of  the  direct  labor,  as  shown  by  the  pay- 
roll, is  debited  to  the  Labor  account;  and  this  account 
is  credited  with  the  amounts  of  direct  labor  distributed 
to  the  various  departments,  orders,  jobs,  or  articles,  in 
accordance  with  the  system  used.  The  advantage  of 
having  the  cost  period  in  agreement  with  the  pay-roll 
periods  is  noticeable  here,  because  if  the  cost  period  and 
pay-roll  period  are  in  agreement,  no  balance  will  appear 
upon  this  account. 

(3)  Indirect  Expense  Account 

The  Indirect  Expense  account  is  debited  w^ith  the 
expenses  incurred,  and  credited  with  any  allowances  made 
by  creditors  on  expense  items,  and  with  the  amounts  dis- 
tributed to  each  job,  order,  article,  or  department. 
Separate  accounts  may  be  kept  in  the  ledger  for  each 
class  of  indirect  expense.  When,  however,  the  indirect 
expenses  are  kept  in  one  account,  they  should  be  analyzed 


122  COST   ACCOUNTING 

on  the  statement  of  factory  expenditures.  The  balance 
of  the  Indirect  Expense  account  is  generally  a  debit,  rep- 
resenting prepaid  expenses  to  be  carried  as  deferred  charges. 

(4)  Work  in  Process  Account 

For  the  purpose  of  controlHng  the  work  in  process, 
accounts  may  be  kept  in  the  factory  ledger  in  any  one  of 
three  ways: 

(i)  An  account  styled  "Work  in  Process"  may  be 
kept,  which  will  show  in  total  what  is  shown  in  detail  by 
the  cost  sheets.  The  account  is  debited  with  the  material, 
labor  and  indirect  expenses  chargeable  to  the  various 
departments,  orders,  jobs,  or  articles  upon  which  opera- 
tions have  been  begun,  and  is  credited  with  the  total 
cost  of  the  part-finished  or  finished  work.  The  balance  of  the 
account  then  represents  the  amount  of  work  still  in  process, 
and  should  agree  with  the  cost  of  the  unfinished  work  as 
shown  by  the  detailed  cost  sheets. 

(2)  Accounts  may  be  kept  which  will  show  the  work 
in  process  in  each  operating  department.  When  work 
is  transferred  to  a  department  the  Work  in  Process  account 
of  that  department  is  debited  with  any  cost  incurred  in 
previous  operating  departments,  and  to  this  is  added  the 
material,  labor  and  overhead  cost  incurred  in  the  depart- 
ment itself.  When  the  product  is  transferred  to  another 
department  the  account  is  credited  with  the  total  cost, 
thus  balancing  as  to  that  particular  work.  Any  balance 
remaining  shows  the  cost  of  the  unfinished  work  in  that 
department,  and  should  agree  with  the  detailed  depart- 
mental cost  sheets  of  jobs,  orders,  or  articles. 

(3)  Accounts  may  be  kept  with  each  order,  job  or 
article.  The  material,  labor  and  indirect  expense,  as 
distributed,  are  debited  to  the  order,  job  or  article,  and 
the  account  is  credited  with  the  total  cost  when  the  work 


COiMriLIx\G   THE   COST    DATA 


123 


is  completed  and  transferred  to  stock.     The  balance  of  each 
account  shows  the  costs  incurred  on  the  unfinished  work. 

(5)  Part-Finished  Stock  Account 

This  account  is  debited  with  the  cost  of  part-finished 
stock  as  far  as  it  has  been  incurred,  and  credited  with 
the  cost  of  any  part-finished  stock  requisitioned  out, 
whether  for  the  purpose  of  completing,  assembling,  or  sell- 
ing. The  balance  shows  the  cost  of  the  part-finished 
stock  on  hand,  and  should  agree  with  the  total  of  the 
balances  as  shown  in  the  detailed  records  of  part-finished 
stock. 

(6)  Finished  Stock  Account 

The  Finished  Stock  account  is  kept  in  the  same  manner 
as  the  other  stock  accounts,  being  debited  with  the 
cost  of  the  product  transferred  to  finished  stock,  and 
also  with  the  cost  of  any  finished  stock  returned  by  cus- 
tomers. The  account  is  credited  with  the  cost  of  the 
product  sold,  the  balance  representing  the  cost  of  the 
finished  stock  on  hand,  which  should  agree  with  the  total 
of  the  balances  as  taken  from  the  detailed  finished  stock 
records. 

(7)  General  or  Private  Ledger  Account 

This  account  serves  a  twofold  purpose :  first,  as  the 
connecting  link  between  the  cost  records  and  the  financial 
records ;  and  second,  as  what  may  be  termed  the  balancing 
account  of  the  factory  ledger.  By  means  of  this  account 
a  trial  balance  of  the  factory  ledger  may  be  prepared  at 
the  end  of  a  cost  period,  which  should  prove  the  mathe- 
matical accuracy  of  the  postings  to  the  factory  ledger, 
independently  of  the  financial  records. 

This  account  is  debited  or  credited  as  may  be  neces- 


124  COST   ACCOUNTING  ! 

sary  when  any  information  entering  into  the  cost  records  |i 
is  obtained  from  the  financial  records.  For  instance,  i 
when  the  material,  labor  or  indirect  expenses  are  sum-  ' 
marized  from  the  accounts  payable  vouchers  in  the  factory 
ledger  columns  of  the  register  of  accounts  payable,  and 
the  details  of  this  factory  ledger  column  are  posted  to 
the  debit  of  the  material,  labor,  and  indirect  expense  ac- 
counts in  the  factory  ledger,  the  General  or  Private  Ledger 
account  is  credited.  This  procedure  maintains  the  equi- 
librium of  the  factory  ledger  and  also  gives  the  general  or 
private  ledger  credit  for  the  expenditures  which  were  in- 
curred for  the  factory.  On  the  other  hand,  when  shipments 
of  finished  or  part-finished  stock  are  made,  and  the  stock 
accounts  in  the  factory  ledger  are  credited,  a  charge  is 
made  to  the  General  or  Private  Ledger  account,  for  the 
reason  that  the  merchandise  has  practically  left  the  fac- 
tory and  the  factory  records  as  well,  and  is  now  included 
in  the  accounts  upon  the  financial  books.  The  balance 
of  this  General  or  Private  Ledger  account  is  generally 
a  credit  balance  and  should  agree  with  the  debit  balance 
of  the  Factory  Ledger  account  in  the  private  or  general 
ledger. 

Illustrative  Journal  Entries 

In  concluding  the  description  of  the  records  for  com- 
piling cost  data,  it  may  be  advisable  to  trace  the  more 
common  entries  through  the  journal,  showing  how  the 
accounts  in  the  factory  ledger  are  affected.  It  should  be 
borne  in  mind  that  these  entries  pertain  only  to  the  cost 
records,  and  are  given  merely  to  illustrate  the  entries 
which  are  most  likely  to  be  used,  as  it  would  be  practi- 
cally impossible  to  give  entries  covering  every  point  under 
the  specific  conditions  of  various  plants.  Some  of  the 
entries  which  follow  might  be  combined,  thereby  saving 


COMPILING   THE   COST   DATA  125 

time   in   posting,   but    they   are   presented   here   in   their 
simplest  forms  for  the  sake  of  greater  clearness. 

Raw  Material  and  Supplies  Account 

To  General  or  Private  Ledger  Account  .... 

For  the  total  amount  of  material 
and  supplies  purchased  and  received 
during  the  period. 

Labor  Account 

To  General  Ledger  or  Private  Ledger 

Account .... 

For  the  total  amount  of  wages  dur- 
ing the  period. 

Indirect  Expenses  Account 

To  General  or  Private  Ledger  Account  .... 

For  the  total  amount  of  indirect  ex- 
penses incurred  during  the  period. 

Work   in    Process,   Department,   Job,    Order 

or  Article  Accounts 

To   Material   and   Supplies   Account ....  .... 

Total  amount  of  materials  and  sup- 
plies requisitioned  out  and  chargeable 
to  the  product. 


Work  in  Process,  Department,  Job,  Order 

or  Article  Accounts 

Indirect  Expense  Accounts 

To  Labor  Account 


126  COST   ACCOUNTING 

To  distribute  the  pay-roll  for  the 
period,  charging  the  direct  labor  di- 
rectly to  the  product  or  operation, 
and  the  indirect  labor  to  the  indirect 
expenses. 


Work  in  Process,  Department,  Job,  Order 

or  Article  Accounts 

To  Indirect  Expense  Accounts 

For  the  total  amount  of  indirect  ex- 
penses distributed  and  charged  to  the 
product. 


Part-Finished  or  Finished  Stock  Account.  . 

To  Work  in  Process,  Department,  Job, 

Order  or  Article  Accounts 

For  the  total  amount  of  product 
transferred  to  the  stock,  either  part- 
finished  or  finished. 


Work  in  Process,  Department,  Job,  Order 

or  Article  Accounts 

To  Part-Finished  Stock 

For  the  total  amount  of  part-finished 
stock  transferred  to  operating  de- 
partments to  be  completed. 


General  Ledger  or  Private  Ledger  Account 

To    Part-Finished    or    Finished    Stock 

Accounts 

For  the  total  amount  of  the  cost 
of  the  goods  sold  during  the  period. 


CHAPTER  IX 

CONTROL   OF   THE    COST    RECORDS    BY   THE 
FINANCIAL    RECORDS 

Methods  of  Controlling  Cost  Records 

The  description  and  analysis  of  the  financial  records 
as  a  whole  is  a  subject  for  special  books;  but  since  the 
cost  records  are  practically  an  analysis  of  an  account  or 
accounts  appearing  in  the  financial  records,  it  is  necessary 
to  consider  the  accounts  which  are  afifected.  In  a  com- 
plete cost  system  the  cost  records  may  be  controlled  and 
interlocked  with  the  financial  records  in  one  of  two  ways : 

(i)  Accounts  may  be  kept  in  the  general  ledger, 
which  should  control  the  various  items  of  production  cost 
in  its  various  stages.  For  instance,  accounts  should  be 
kept  with  material,  labor  and  indirect  expenses,  work 
in  process,  and  part-finished  and  finished  stock,  entries 
being  made  to  these  accounts  in  the  same  manner  as  if 
they  were  kept  in  the  factory  ledger. 

(2)  An  account  styled  the  "Factory  Ledger  Account" 
may  be  kept  in  this  general  ledger.  This  account  repre- 
sents in  total  what  is  shown  in  detail  by  the  factory  or 
cost  records,  and  the  balance  is  usually  a  debit,  agree- 
ing with  the  credit  balance  of  the  General  or  Private 
Ledger  account  in  the  factory  ledger.  The  Factory 
Ledger  account  is  debited  with  all  charges  to  the  factory, 
as  represented  by  the  total  of  the  factory  ledger  column 
in  the  register  of  accounts  payable,  the  details  of  which 
127 


128  COST    ACCOUNTING 

are  analyzed  in  the  factory  ledger  accounts.  The  Fac- 
tory Ledger  account  is  credited  with  the  total  cost  of 
sales  as  shown  by  the  register  of  sales  and  costs,  when 
this  is  debited  to  the  Sales  account. 

Sales  Accounts 

The  sales  accounts  may  be  divided  or  classified  accord- 
ing to  departments — departments  here  meaning  divisions 
of  the  articles  sold.  They  are  debited  with  the  cost  of 
merchandise  sold  at  the  time  this  cost  is  credited  to  the 
Factory  Ledger  account.  They  are  credited  with  the 
total  amount  of  the  sales — less  returns — as  obtained 
from  the  register  of  sales  and  costs,  at  the  time  this  cost 
is  charged  to  the  Accounts  Receivable  controlling  ac- 
count. The  balances  of  the  sales  accounts  represent  the 
gross  profit  or  loss  upon  each  different  classification  of  the 
sales. 

Selling  Expenses 

A  single  account  may  be  kept  embracing  all  selling 
expenses,  and  this  account  may  be  analyzed  at  the  end 
of  the  cost  period;  but  it  may  also  be  well,  where  practi- 
cable, to  keep  separate  accounts  showing  the  selling 
expenses  for  each  classification  of  the  sales  accounts. 
Part  of  the  advertising,  commissions,  salaries,  etc.,  can 
be  related  directly  to  certain  classes  of  product ;  and  these 
products  should  always  bear  such  expenses.  The  ex- 
penses that  cannot  be  so  charged  may  be  kept  in  a 
General  Selling  Expense  account,  and  apportioned  over 
the  classified  accounts  on  some  arbitrary  basis,  such  as 
the  cost  of  sales,  or  the  volume  of  business  done.  If 
there  is  a  balance  in  the  General  Selling  Expense  account, 
it  is  generally  a  debit,  and  may  represent  a  deferred 
charge — that  is,  a  certain  amount  of  selling  expense  in- 


CONTROL   OF    COST    RECORDS  129 

ciirred  but  not  yet  distributed,  for  the  reason  that  it 
is  chargeable  to  future  operations  of  the  business. 

Separate  accounts  are  usually  kept  for  each  class  of 
selling  expense,  to  show  the  amounts  spent  for  each 
item.  Each  account  should  be  charged  with  the  amount 
spent,  and  credited  with  deductions  for  any  allowances 
made,  and  with  the  amount  distributed  to  the  Profit  and 
Loss  accounts. 

Administrative  Expenses 

i  Attention  is  called  to  the  fact  that  the  distinction  be- 
tween administrative  expenses  and  production  costs  on 
the  one  hand,  and  selling  expenses  on  the  other,  may  be 
an  artificial  one  only,  as  in  many  cases  the  administrative 
expenses  are  incurred  through  action  or  effort  that  may 
be  in  the  interest  of  either  production  or  selling.  There- 
fore it  should  be  borne  in  mind  that  any  expenses  that 
afTect  either  the  manufacturing  or  selling  departments 
should  be  charged,  wherever  practicable,  to  the  proper 
classification  in  the  department  affected.  Some  of  the 
items  usually  listed  as  administrative  expenses  are  as 
follows: 

Salaries  of  officers 
'  Salaries  of  office  clerks 

Rent  of  offices 

Light  and  heat  of  offices 

Telegraph  and  telephone 

Stationery  and  printing 

Postage 

Legal  expenses 

Car  fares  and  incidentals 

Subscriptions 

Donations 

Miscellaneous 


130 


COST    ACCOUNTING 


These  accounts  are  charged  with  the  expenses  in- 
curred, and  credited  with  any  allowances.  The  balance 
may  be  distributed  over  the  various  classifications  of  the 
sales  upon  some  such  basis  as  used  in  the  distribution  of 
the  selling  expenses. 

Monthly  Profit  and  Loss  Statement  (Form  68) 

The  nature  and  size  of  the  business,  as  well  as  the 
scope  and  type  of  the  accounting  system,  will  largely 
determine  the  nature  of  the  profit  and  loss  statement  to 
be  prepared.  It  may  deal  only  with  the  totals  of  the  vari- 
ous departments  or  classes  of  product,  showing  the  sales, 
cost  of  sales,  gross  profit,  selling  expenses,  administrative 
expenses,  and  net  profit  or  loss ;  or,  on  the  other  hand, 
it  may  be  prepared  so  as  to  disclose  the  details  of  the  cost 
elements,  selling  expenses  and  administrative  expenses, 
together  with  various  percentages  which  are  of  value  for 
comparative  purposes. 

All  records,  including  both  the  financial  and  cost 
accounts,  should  be  arranged  so  as  to  facilitate  the  prepa- 
ration of  statements. 

All  information  called  for  by  the  profit  and  loss  state- 
ment may  be  obtained  from  the  private  or  general  ledger. 
Under  the  caption  "Departments"  will  be  shown  the 
classification  of  the  various  selling  products.  Under  the 
caption  "Sales"  in  the  statement  of  profit  and  loss  will 
be  entered  the  total  debit  and  credit  of  the  departmental 
accounts;  under  the  sub-caption  "Amount"  the  sales; 
and  under  the  sub-caption  "Costs"  the  cost  of  the  sales, 
this  cost  being  made  up  of  the  complete  factory  cost  of 
the  product,  including  all  indirect  expenses.  Under  the 
caption  "Gross  Profit"  is  entered  the  difference  between 
the  amount  of  the  sales  and  the  costs,  as  shown  in  the 
private  or  general  ledger.    Under  the  caption  "Expenses" 


CONTROL    OF    COST    RECORDS 


131 


the  totals  of  the  selling  and  of  the  administrative  ex- 
penses should  be  entered,  at  the  bottom  of  the  page,  in 
their  proper  columns.  These  totals  may  then  be  prorated 
over  the  dififerent  departments  on  the  basis  of  the  per- 
centage of  the  cost  of  the  sales,  and  the  amount  to  be 
charged  to  each  department  entered  in  the  proper  posi- 
tion in  its  column.  Under  the  sub-caption  "Total"  is 
shown  the  total  of  the  two  classifications  of  expenses; 
and  under  the  caption  "Net  Profit"  is  shown  the  net 
profit  or  loss  of  each  selling  department,  obtained  by 
deducting  the  total  expenses  from  the  gross  profit.  In 
the  last  column  are  shown  the  percentages  of  net  profit 
in  each  department. 

The  preparation  of  this  statement  from  the  private  or 
general  ledger,  at  the  end  of  the  month,  will  be  merely 
a  matter  of  copying  ofif  the  balances  of  the  departmental 
accounts,  and  distributing  the  balances  of  the  expense 
accounts. 

This  statement  gives  a  summary  of  all  the  trans- 
actions of  the  business  for  each  month,  and  represents 
the  final  outcome  of  all  factory  operations  that  affect  the 
cost  of  goods  sold  during  the  month. 

It  should  be  borne  in  mind  that  every  figure  appear- 
ing on  this  statement  is  supported  by  other  references ; 
and  any  figures  shown  in  the-  "Net  Profit"  column  which 
are  not  satisfactory  to  the  management  may  be  investi- 
gated, the  cause  of  any  loss  in  percentage  shown,  the 
reason  ascertained,  and  the  remedy  applied. 

Balance  Sheet  (Form  69) 

The  balance  sheet  is  the  statement  which  shows  the 
financial  status  of  an  enterprise,  and  is  prepared  monthly 
from  the  accounts  in  the  general  or  private  ledger.  Under 
the  caption  "Current  Month"  is  stated  the  balance  of  the 


I 


132 


COST   ACCOUNTING 


account  for  the  month  in  question,  and  under  the  caption 
"Increase  or  Decrease"  is  shown  the  increase  or  decrease 
from  the  balance  of  the  preceding  month. 

One  of  the  most  important  points  in  connection  with 
a  monthly  financial  statement  is  the  fact  that  it  brings 
before  the  management  every  month  the  financial  status 
of  the  company  as  a  whole,  showing  the  profits  and  losses, 
assets  and  liabihties. 

Under    the    so-called    "Inventory  Method,"    profit    or 
loss   is   only   ascertained   at    long   intervals;   and   in   the 
majority  of  cases,  an  unsatisfactory  exhibit  of  earnings 
cannot  be  investigated  sufficiently  to  be  of  any  material  \ 
benefit.     Even  where  such  an  investigation  is  possible  and 
results  in  a  betterment  of  conditions,  there  is  usually  a  ' 
large  loss  already  incurred  due  to  the  delay  in  discover-  i 
ing  the  defective  conditions,  whereas,  under  an  account-  ' 
ing   system    in    which    earnings    are    shown    monthly    in 
analytical  form,  any  loss  or  leakage  can  be  immediately 
investigated,  and  can,  as  a  rule,  be  stopped  at  once,  or  else 
be   so  minimized   that   no   serious   loss   is   incurred.      The 
advantage  to  the  manufacturer  is  obvious. 

I 
Salesmen's  Costs  (Form  66)  ' 

In   addition   to    the    records   already   described,   it   is 
often  advisable  to  keep  a  record  of  salesmen's  costs,  which 
will  prove  valuable  as  a  basis  for  comparing  the  ability  of  , 
one  man  with  another,  or  one  territory  or  period  with 
another. 

Provision  may  be  made  for  showing  the  amount  of 
sales,  cost  of  sales  and  gross  profit,  and  the  salaries,  com- 
missions and  traveling  expenses  of  each  man,  together 
with  percentages.  All  information  of  this  nature  may  be 
used  to  advantage  in  adjusting  salaries,  commissions  and 
expenses  of  the  salesmen. 


CONTROL    OF    COST    RECORDS 


133 


Plant  and  Tool  Records  (Form  70) 

Valuable  information  which  can  be  used  in  determin- 
ing the  rate  of  depreciation,  appraising  the  equipment, 
etc.,  is  often  obtained  from  records  showing  the  cost 
value  of  machinery,  tools  or  other  equipment.  Besides 
making  provision  for  recording  the  first  cost,  the  form 
may  be  designed  to  provide  for  installation  charges,  expenses 
for  repairs  and  maintenance,  depreciation,  etc.  This  infor- 
mation may  prove  especially  valuable  in  determining  whether 
it  is  cheaper  to  maintain  the  old  equipment  or  to  buy  new. 

In  plants  where  a  tool-room  is  part  of  the  factory 
organization,  it  is  well  to  keep  tool  records  in  the  same 
way  as  the  material  stock  record,  classifying  and  arrang- 
ing the  tools  so  as  to  show  the  quantity,  and  those  available 
for  each  particular  job  or  machine. 


CHAPTER  X 

THE   EXAMINATION    OF   A    PLANT 

Reasons  for  Examination 

The  basis  of  any  successful  cost  system  must  be 
sought  in  the  nature  of  the  manufacturing  operations, 
and  this  presupposes  a  physical  examination  of  the  plant. 
It  is  not  enough  to  inspect  the  books,  for  an  analysis  of 
accounts  cannot  give  all  the  necessary  data.  The  extent 
and  character  of  the  information  needed  is  limited  only 
by  the  boundaries  of  the  business;  and  its  classification 
is  a  matter  of  highest  importance  to  the  systematizes  He 
should  have  a  definite  knowledge  of  how  to  go  at  things, 
and  of  the  object  of  each  question  he  may  ask.  In  other 
words,  the  examination  should  be  systematic  and  thorough. 

Procedure 

The  examination  should  begin  where  the  raw  material 
is  received,  and  end  with  the  office  records.  It  should 
follow  step  by  step  each  process  of  manufacture,  includ- 
ing the  auxiliary  activities  of  the  plant  as  they  arise  in 
connection  with  the  operations.  Circumstances  will  de- 
termine just  where,  along  this  line,  the  power  plant 
should  be  inspected,  but  the  application  and  transmission 
of  power  should  be  considered  in  connection  with  each 
department. 

The  general  type  of  system  will  be  suggested  by  the 
nature  of  the  product  and  processes,  and  one  of  the  first 
134 


THE    EXAMINATION    OF    A    PLANT  13^ 

considerations  must  be  to  see  that  the  hnes  are  properly- 
drawn  between  processes,  so  as  to  provide  for  a  working 
system  of  operating  departments.  As  far  as  possible, 
each  department  should  be  limited  to  single  operations, 
in  order  that  the  costs  may  be  analyzed  in  the  same 
measure. 

The  necessary  information  for  the  installation  of  a  cost 
system  may  be  divided  into  four  general  classifications,  viz. : 

(i)  Raw  material 

(2)  Power,  machinery  and  processes 

(3)  Direct  labor 

(4)  Indirect  labor,   supplies  and  gen- 
eral indirect  expenses 

Raw  Material  and  Storeroom 

Under  raw  material,  it  should  be  noted  how  the  raw 
material  is  received,  checked,  stored  and  put  into  opera- 
tion. It  should  then  be  followed  through  the  factory, 
step  by  step,  until  it  is  ready  for  sale  as  finished  stock. 
The  maximum  and  minimum  quantities  necessary  should 
be  known,  and  the  disposition  or  utilization  of  waste  and 
scrap  material  should  be  looked  into  carefully.  Special 
attention  should  be  given  to  the  methods  of  storing 
material  and  part-finished  stock,  and  to  the  possibility 
of  improvements  along  that  line.  If  a  stock  system  is 
not  used,  there  is  no  one  place  where  leaks  are  more 
likely  to  be  found  than  in  the  storeroom.  The  ordinary 
manufacturer  insists  that  his  cash  be  kept  exact  to  the 
cent,  while  hundreds  of  dollars'  worth  of  material  may  lie 
around  in  different  parts  of  the  plant  with  no  effective 
methods  of  safeguarding  it,  or  even  of  showing  when  parts 
of  it  have  disappeared.  The  extra  trouble  of  keeping  a 
stock  system  is  usually  paid  for  many  times  over  by  the 


136  COST   ACCOUNTING 

saving  of  stock  and  the  practical  value  and  convenience 
of  being  able  to  tell  at  any  time  just  what  stock  is  on 
hand  and  where  it  is. 

As  a  rule,  the  best  plan  is  to  have  one  storeroom  cen- 
trally located;  this,  however,  is  not  always  practicable. 
For  instance,  pig  iron  should  be  unloaded  in  the  yards 
close  to  the  cupola,  and  certain  materials  must  sometimes 
be  shipped  direct  to  an  operating  department  and  not 
opened  until  used. 

Power,  Machinery  and  Processes 

The  information  relative  to  machinery  should  include 
cost,  floor  space,  and,  in  fact,  all  data  necessary  for  the 
calculation  of  assignable  indirect  expenses. 

It  should  be  determined  whether  tests  for  power  have 
ever  been  made,  and  if  the  conditions  make  it  desirable, 
the  tests  should  be  brought  up  to  date. 

The  general  arrangement  of  the  departments  and 
machinery  should  be  inspected  very  closely,  with  the  idea 
of  making  the  whole  process  as  continuous  as  possible. 
Much  time  and  money  are  wasted  in  rehandling  material, 
when  machines  are  placed  in  disadvantageous  positions. 

The  average  and  maximum  efficiency  of  machines 
should  be  known,  and  whether  they  are  automatic  or 
otherwise.  This  latter  point  is  often  important  in  arrang- 
ing details  for  the  gathering  and  compiling  of  costs.  If 
a  machine  rate  is  to  be  used,  the  examination  is,  of  course, 
more  detailed  and  thorough  than  in  the  case  of  the  pro- 
ductive labor  method. 

Labor 

The  number  of  men  occupied  in  productive  labor  must 
be  recorded  for  each  department,  and  distinguished  from 
those  occupied  on  indirect  labor.    The  entire  labor  force  of 


THE   EXAMINATION    OF   A    PLANT 


137 


the  plant  must  be  classified  in  this  way  according  to  depart- 
ments. The  wages  paid  are  not  a  matter  for  immediate 
consideration,  though  the  method  of  payment  is  im- 
portant, as  it  may  make  considerable  difference  in  the 
design  of  time  cards,  and  often  in  the  method  of  dis- 
tributing the  indirect  expenses. 

The  information  regarding  machines  and  necessary 
supplies  must  also  be  arranged  according  to  departments, 
so  that  these  items  may  be  used  in  calculating  the  depart- 
mental indirect  expenses. 

Indirect  Expenses 

The  last  step  is  to  classify  all  the  general  expenses  so 
as  to  provide  for  an  analysis  by  items.  Expenses  that  can 
be  connected  with  any  particular  operation  should  be  dis- 
tinguished from  the  general  expenses;  and  expenses  such 
as  depreciation,  insurance,  heat,  etc.,  should  be  dissected 
and  apportioned  over  the  departments  and  plant  as  a 
whole,  according  to  the  plan  to  be  used. 

IMuch  of  the  data  relative  to  labor,  supplies,  and  gen- 
eral operating  expenses  may  be  found  in  the  general 
accounting  books,  but  whether  or  not  the  accounts  in 
these  books  will  be  useful  for  classification  of  expenses 
depends  entirely  upon  how  they  have  been  kept.  When 
the  accounts  show  the  expenses  well  itemized  and 
arranged,  they  may  present  valuable  information  which 
would  otherwise  have  to  be  determined  by  estimate  or  experi- 
ment. The  manufacturer  may  not  care  to  have  his  whole 
bookkeeping  system  revised,  and  this  should  be  borne 
in  mind  in  arranging  the  details  of  the  cost  accounts. 

Efficiency 

In  addition  to  collecting  constructive  information 
along  the  general  lines  mentioned,  the  examiner  should 


138 


COST    ACCOUNTING 


keep  in  mind  many  other  considerations  which  relate  to 
efficiency.  Some  of  these  have  already  been  mentioned  or 
impHed,  but  it  would  be  well  to  classify  them  along 
definite  lines.  They  do  not  apply  to  any  particular  part 
of  the  examination;  but  every  phase  of  manufacturing 
should  be  criticized  from  an  efficiency  standpoint. 

Organization 

The  underlying  purpose  of  organization  is  to  bring 
each  and  every  activity  of  a  plant  under  the  notice  and 
control  of  the  men  responsible  for  its  proper  operation. 
Thus,  in  inspecting  any  department,  its  relation  to  the  pre- 
ceding and  succeeding  departments,  and  the  methods  by 
which  its  operations  are  reported  and  controlled  by  the 
shop  manager,  should  be  carefully  studied.  The  whole 
field  is  so  large  that  it  is  only  possible  to  suggest  certain 
necessary  lines  of  investigation.  For  instance,  storeroom 
facilities  and  the  stock  system  in  use,  as  mentioned  be- 
fore, should  be  reported  upon,  and  the  report  should  also 
cover  part-finished  stock,  the  assembling  department, 
tool-room,  patterns  and  dies,  defective  work  reports,  the 
method  of  requisitioning  material  and  supplies,  handling 
of  time  reports,  inspection  of  work,  the  packing  and  clean- 
ing departments,  how  production  orders  are  issued  and 
production  reports  made  out,  how  the  work  is  planned 
in  advance,  how  excess  time  on  operations  is  accounted 
for  and  how  responsibility  is  defined.  These  and  many 
other  questions  arise  during  the  course  of  the  examina- 


Mechanical  Aids 

Besides  the  examination  of  the  regular  machinery, 
attention  should  be  directed  to  the  auxiliary  mechanical 
service,  which  is  a  very  important  factor  in  running  a  shop 


THE    EXAMINATION    OF    A    PLANT 


139 


to  the  best  advantage.  This  field,  Hke  that  of  organiza- 
tion, is  wide;  but  the  following  subjects  are  suggested 
which  may  give  rise  to  practical  ideas:  time  clocks,  time 
stamps,  patent  time  cards,  carrying  belts,  automatic 
counters,  arrangements  of  yard  service,  factory  telephones, 
mechanical  devices  in  the  of^ce,  standard  jigs  and  dies, 
special  arrangements  for  heavy  or  peculiar  tools,  etc. 

Ventilation 

The  matter  of  heat,  light,  and  ventilation  is  so  im- 
portant that  it  requires  special  attention.  Bad  air  makes 
the  workmen  dull  and  listless,  and  everything  drags, 
simply  because  there  isn't  enough  oxygen  on  hand  to 
supply  the  blood  properly.  Less  work  is  done  at  a  greater 
expense  of  effort. 

Leaks 

A  watch  should  be  kept  for  "leaks,"  especially  in 
places  where  they  may  exist  unnoticed.  The  wastes  that 
appear  in  lost  or  spoiled  material  and  time  idled  away  are 
among  the  more  prominent  and  more  costly  leaks.  Large 
losses  are  sometimes  incurred  by  failure  to  completely 
check  material  received,  as  in  cases  where  barrels  are  not 
opened  to  see  that  they  are  full,  etc.  Spoiled  material  is 
likely  to  be  concealed  if  there  is  not  a  system  of  material 
requisitions  in  use.  Time  may  be  lost  through  poor  fore- 
manship,  especially  where  departments  are  not  properly 
balanced,  and  where  the  men  in  one  department  wait  for 
another  department  to  send  work  to  them. 

Time  lost  in  carrying  materials,  crowding  of  aisles  with 
goods,  scattering  of  men's  time  on  odd  jobs,  unnecessary 
consumption  of  power,  waste  of  scrap  material,  incon- 
venience in  location  of  tools  and  dies,  poor  toilet  facilities, 
etc.,  are  all  signs  that  losses  are  being  incurred  which,  al- 


I40 


COST   ACCOUNTING 


though  small  in  any  special  case,  amount  to  considerable 
sums  when  spread  over  a  whole  factory  for  a  period  of 
time. 

The  examiner  should  also  take  note  of  all  places  where 
the  work  seems  to  be  going  on  half-heartedly.  Such  places 
will  require  attention  and  perhaps  special  measures,  but 
the  returns  will  justify  it. 

Summary 

While  the  examiner's  mind  is  occupied  with  the  active 
details  of  his  examination,  he  must  be  subconsciously  con- 
sidering how  each  feature  that  develops  is  going  to  find 
a  place  in  the  cost  system,  and  what  special  modifications 
are  needed  to  make  the  system  fit  the  conditions.  Thus 
his  information  is  of  two  kinds :  first,  the  constructive 
information  necessary  to  the  designing  of  the  system;  and 
second,  a  critical  knowledge  of  the  defects  and  inefificient 
spots  that  need  immediate  attention.  It  must  not  be 
thought,  however,  that  an  examination  will  discover  any- 
thing but  surface  defects;  it  remains  for  the  cost  system 
itself  to  detect  and  locate  those  beneath  the  surface. 

Details  of  Examination  Information 

It  is  suggested  that  the  examiner  have  with  him  a 
schedule  of  questions  which  will  serve  both  to  classify  his 
information  and  to  keep  him  from  overlooking  more  or 
less  important  details.  The  questions  which  follow,  while 
suitable  for  this  purpose,  are  not  expected  to  cover  every 
possible  condition.  The  examiner  in  charge  will  be  able, 
however,  to  cover  the  greater  portion  of  the  investigation 
by  use  of  these  queries  and  instructions,  and  to  supple- 
ment them  when  necessary.  It  is  impossible  to  obtain 
too  much  information,  and  nothing  is  too  unimportant 
to  notice. 


THE    EXAMINATION    OF    A    PLANT 


141 


Schedule  of  Questions  for  Examination  of  a  Plant 

(i)  Purchase  Division 

1.  Are  purchases  made  on  verbal  or  written  requisi- 
tions?   Give  full  particulars. 

2.  Is  there  any  one  responsible  head,  or  are  purchases 
made  by  several?    Particulars. 

3.  Are  complete  records  made  of  quotations  received? 

4.  Is  any  accounting  done  in  this  division?    If  so,  de- 
scribe it. 

5.  Describe  filing  methods,  including  catalogues. 

6.  Are  any  orders  placed  verbally?     If  so,  are  they 
promptly  confirmed  in  writing? 

7.  Obtain  copies  of  all  forms  and  books  used. 

8.  Give  ofifice  force  and  duties  of  each. 

9.  Remarks. 

(2)  Receiving  Department 

1.  How  are  incoming  goods  handled? 

2.  Are  there  any  mechanical  appliances?    Describe. 

3.  What  records  are  maintained? 

4.  Is  there  a  track  scale  and  a  car  record  kept?     If 
not,  how  are  car-loads  received  and  checked  out  ? 

5.  How  are  partial   shipments  checked   up   and   re- 
ported? 

6.  Is  trucking  equipment  owned?    What  sort? 

7.  Obtain  copies  of  report  or  record  forms,  books,  etc. 

8.  If  any   goods   are   returned,    how   is   accounting 
handled? 

9.  How  are  overs,  shorts  or  damaged  goods  reported 
to  purchasing  department? 

10.  Remarks. 


142 


COST   ACCOUNTING 


(3)  Storeroom 

1.  Are  storerooms  maintained  for  all  raw  materials 
and  parts? 

2.  How  many,  and  where  located  ? 

3.  Do  employees  have  access  to  stores? 

4.  Are  heavy  goods  conveniently  arranged  as  to 
classes  and  convenience  of  handling?  Are  they  properly 
marked  or  tagged,  and  are  there  signs  or  other  methods 
for  locating  classes? 

5.  Are  there  any  mechanical  devices  such  as  trolleys, 
tiering  machines,  cars,  etc.?    If  so,  describe. 

6.  Are  there  bins,  shelves,  racks,  etc.,  of  sufficient 
capacity,  and  are  they  arranged  to  best  advantage  for 
economical  handling  of  goods? 

7.  Are  bin  cards  used? 

8.  Are  parts  manufactured  and  carried  in  stock? 

9.  Could  any  such  parts  be  purchased  for  less  money? 

10.  Is    raw   material    carried    in    stock    after   passing 
through  a  process?    If  so,  describe  and  state  why. 

11.  How  is  the  quality  of  goods  tested  when  received? 

12.  What  checks  are  maintained  as  to  correctness  of 
deliveries  to  manufacturing  departments? 

13.  How  are  such  deliveries  made,  and  are  there  tote 
boxes  or  other  standard  devices  used? 

14.  Are  all  deliveries  covered  by  requisitions?    If  not, 
note  exceptions  and  reasons. 

15.  Does  storekeeper  have  copies  of  all  standard  bills 
of  material  or  specifications? 

16.  Are  factory  supplies  furnished  to  departments  on 
requisition?    If  not,  how  handled? 

17.  Are  obsolete  parts  or  surplus  stock  reported  regu- 
larly to  the  management? 

18.  How  are  returnable  containers  handled  and  ac- 
counted for? 


THE    EXAMINATION    OF    A    PLANT 


143 


19.  How  does  storekeeper  request  purchases? 

20.  Is  a  perpetual  inventory  maintained,  and,  if  so,  how 
verified  ? 

21.  Does  such  inventory  show  quantities  only,  or  values 
and  costs  as  well? 

22.  How  many  employees,  and  what  are  their  duties  ? 

23.  Does  department  appear  to  be  efficiently  handled? 

24.  How    does    storekeeper    handle    excess    materials 
issued  and  returned  to  stores? 

25.  Obtain  copies  of  every  form  or  record. 

26.  Remarks. 

(4)  Dry  Kilns 

1.  Type  of  kilns  used;  i.e.,  direct  heat  or  vapor 
process?    Describe  equipment  and  manner  of  operating. 

2.  Is  exhaust  steam  or  live  steam  used? 

3.  Is  lumber  measured  or  weighed  in  and  out?  If  not, 
how  is  quantity  dried  accounted  for? 

4.  Is  there  any  special  fire  protection?    If  so,  what? 

5.  How  far  away  from  factory  buildings  are  dry  kilns 
located? 

6.  Is  any  attempt  made  to  record  cost  of  drying?  If 
so,  state  particulars. 

7.  How  many  employees,  and  what  are  their  duties? 

8.  Obtain  copies  of  forms,  if  any. 

9.  Remarks. 

(5)  Power  Department 

1.  Obtain  list  of  equipment,  stating  number,  kind  and 
capacity  of  engines,  boilers,  dynamos,  pumps,  heaters, 
economizers,  traps,  condensers,  etc.,  etc. 

2.  Is  equipment  kept  in  thoroughly  good  condition? 

3.  How  frequently  are  boilers  cleaned  ? 

4.  Is  there  any  reserve  capacity? 


144  COST    ACCOUNTING 

5.  Is  equipment  deficient  in  any  respect?  If  so,  par- 
ticularize. 

6.  Are  there  any  special  safeguards  against  accidents? 

7.  Is  the  power  plant  in  one  unit,  or  in  two  or  more 
units  ?    Describe  each,  if  more  than  one. 

8.  Is  factory  heated  from  central  power  plant? 

9.  Is  any  record  kept  of  power  and  heat  distribution? 

10.  Is  any  record  kept  of  light  distribution? 

11.  Is  any  record  kept  of  air  distribution? 

12.  Is  any  record  kept  of  engine  ef^ciency? 

13.  Is  any  record  kept  of  fuel  consumption? 

14.  Is  exhaust  steam  returned  to  boilers  ? 

15.  How  many  employees,  and  what  are  their  duties? 

16.  Obtain  forms. 

17.  Remarks. 

(6)  Manufacturing — General 

1.  Obtain  list  of  articles  manufactured,  or  furnish 
catalogue. 

2.  How  many  plants,  and  where  located  ?    Describe. 

3.  Are  any  other  plants  controlled  by  the  concern? 
If  so,  explain  relations  and  how  handled. 

4.  Obtain  sketch  of  floor  plans  of  plant  being  exam- 
ined and  indicate  space  occupied  by  each  department. 
Obtain  blueprint  if  possible. 

5.  Obtain  land  area,  and  how  occupied. 

6.  Is  plant  owned  or  rented? 

7.  Could  plant  be  improved  as  to  arrangement  with- 
out undue  expense  ? 

8.  Is  any  record  kept  as  to  maintenance  of  buildings 
and  machiner}^? 

9.  Does  such  record  apply  to  buildings  and  machines 
separately,  or  is  it  in  bulk  ? 

10.  Are  there  special  fire  hydrants,  standpipes  and  hose? 


THE    EXAMINATION    OF    A    PLANT 


145 


11.  Are  they  inspected  frequently  and  kept  in  good 
order? 

12.  Are  there  any  fire-drills? 

13.  Are  there  ample  fire-escapes  and  exits? 

14.  Are  they  kept  clean  and  readily  accessible? 

15.  Does  superintendent  appear  to  be  qualified  to 
handle  the  plant  without  interference? 

16.  Is  he  given  full  authority,  or  is  his  authority  limited 
in  any  way?    Give  particulars. 

17.  Are  duties  of  all  foremen  and  assistants  well  de- 
fined and  thoroughly  understood? 

18.  Are  departments  properly  balanced?  If  not,  give 
reasons. 

19.  Are  there  any  time-clocks,  and  are  employees  super- 
vised when  they  ring  in  and  out? 

20.  Are  any  mechanical  devices  used  for  keeping  time 
on  jobs?    If  so,  describe. 

21.  Is  there  any  special  system  of  interdepartment 
conveyance?  If  so,  describe.  If  not,  or  deficient,  state  im- 
provement necessary  or  desirable. 

22.  Is  there  a  good  system  of  shop  telephones? 

23.  Does  production  consist  of  standard  lines,  special 
orders,  or  both  ?    State  proportion  of  both. 

24.  Are  orders  for  standard  lines  put  through  for  con- 
siderable quantities  of  finished  product  or  for  parts  to  be 
assembled  as  w^anted? 

25.  Is  there  any  system  of  planning  work  in  advance? 
If  so,  describe  it. 

26.  How  are  orders  made  out  and  put  in  work? 

27.  Are  sub-orders  or  tags  made  out,  or  does  original 
shop  order  follow  the  work? 

28.  How  are  orders  numbered  or  identified? 

29.  What  is  the  sequence  of  travel  or  routing  from  de- 
partment to  department? 


146  COST   ACCOUNTING 

30.  Are  there  any  daily  reports  of  progress  made? 
Describe. 

31.  How  is  production  reported  and  verified? 

32.  Are  completed  orders  checked  with  originals  to 
verify  instructions  or  to  compare  estimates  of  time  and 
materials? 

T,;^.  How  are  the  interdepartment  orders  handled ;  i.e., 
orders  for  work  in  form  of  repairs,  or  other  items  not 
directly  concerned  with  production? 

34.  How  is  experimental  work  handled? 

35.  Are  any  parts  interchangeable,  and  to  what  extent? 

36.  Is  finished  product  shipped  out  as  completed,  or 
carried  in  stock? 

37.  Are  individual  records  kept  concerning  late  and 
absent  time  of  men? 

38.  Do  they  have  any  strikes  or  other  labor  troubles 
of  consequence? 

39.  How  is  waste  material  treated? 

40.  Obtain  forms  and  books. 

41.  Remarks. 

(7)  Manufacturing  Departments 

Obtain  the  following  information  for  each  department, 
so  far  as  the  questions  apply,  and  supply  any  additional 
data  necessary  to  cover  requirements  fully : 

1.  Name  of  department. 

2.  Name  of  foreman. 

3.  Number  of  employees. 

4.  How    many    piece-workers?      How    many    day- 
workers  ? 

5.  How  many  non-productive  workers?    Obtain  any 
desirable  information  in  this  connection. 

6.  Does  foreman  appear  to  be  competent? 


THE    EXAMINATION    OF    A    PLANT 


t47 


7.  Has  he  any  assistants? 

8.  Are  instructions  given  to  workers  verbally  or  in 
writing? 

9.  Are  blueprints  or  drawings  furnished  in  all  cases 
where  desirable? 

10.  Obtain  list  of  machines  in  this  department  and 
their  uses  where  name  will  not  clearly  indicate  their 
purpose. 

1 1.  Mention  any  that  are  automatic  or  semi-automatic, 
and  describe  groups  operated  by  one  person  or  team. 

12.  Are  any  machines  obsolete  or  inefficient?  If  so, 
name  them. 

13.  Are  machines  arranged  to  best  advantage  for 
economical  operation?    Suggest  improvements. 

14.  Are  there  any  high-speed  machines  or  tools  used? 
If  so,  indicate  them. 

15.  Are  such  machines  operated  as  rated  by  makers,  or 
have  any  attempts  been  made  to  increase  their  efficiency? 

16.  Are  there  counters  on  any  machines?  If  so,  indi- 
cate them  and  mention  other  machines  where  counters 
would  be  useful. 

17.  If  tempering  or  heating  furnaces  are  employed, 
state  for  what  purpose,  what  kind  of  fuel  used,  and  describe 
operations. 

18.  Are  all  machines  numbered? 

19.  Is  there  a  separate  tool-room  ? 

20.  Are  tools  numbered  or  catalogued? 

21.  Is  there  a  good  tool  system  for  checking  tools? 
Describe. 

22.  Do  workmen  keep  own  tools  in  repair,  or  is  there 
a  toolmaker  employed  for  that  purpose? 

23.  Are  machines  and  transmission  appliances  guarded 
to  protect  employees  against  accidents? 

24.  Are  there  any  tool  or  pattern  maintenance  records? 


148  COST   ACCOUNTING 

25.  Are  there  any  efficiency  records  in  connection  with 
either  men  or  machines? 

26.  What  sort  of  power  is  employed  in  this  department 
and  how  distributed;  i.  e.,  by  individual  motors,  group 
motors,  a  single  motor,  or  direct  from  line  shaft? 

2y.  Is  there  any  record  of  power  cost  either  for  de- 
partment as  a  whole  or  as  applied  to  machines? 

28.  Is  natural  lighting  good?  If  deficient,  explain  why 
and — if  possible — suggest  improvements. 

29.  Obtain  complete  Hst  of  operations  performed  in 
this  department,  indicating  hand  and  machine  work. 
Describe  any  that  are  out  of  the  ordinary. 

30.  Are  operations  standardized  as  to  time,  machines, 
speed,  tools,  etc.? 

31.  Report  on  what  may  be  defective  methods  of  per- 
forming operations,  suggesting  improvements  where  pos- 
sible. 

32.  Describe  timekeeping  system. 

33.  Is  there  any  lost  or  idle  time?    If  so,  explain  why. 

34.  Is  there  any  bonus  or  premium  system  in  force? 

35.  How  are  materials  obtained  and  charged  to  pro- 
duction? 

36.  Is  it  necessary  to  issue  materials  in  excess  of  im- 
mediate requirements  at  times?  If  so,  how  is  the  excess 
cared  for? 

37.  How  is  defective  work  reported  and  disposed  of? 

38.  Are  there  any  methods  in  vogue  to  prevent  the  re- 
placing of  materials  that  have  been  spoiled? 

39.  Do  requisitions  for  replaced  material  indicate  the 
purpose  of  the  withdrawal? 

40.  Is  there  any  undue  waste  of  material  or  time?  If 
so,  is  there  any  apparent  remedy? 

41.  How  is  legitimate  waste  material  disposed  of?  If 
used  again,  describe. 


THE   EXAMINATION    OF   A    PLANT  149 

42.  Is  all  work  properly  tested  or  inspected? 

43.  Is  work  inspected  by  operation,  or  only  when  com- 
pleted? 

44.  Are  there  any  delays  due  to  faults  of  other  de- 
partments?   If  so,  describe  them. 

45.  Is  any  attempt  made  to  keep  shop  in  any  constant 
degree  of  humidity?    How  is  it  ventilated? 

46.  if  manner  of  reporting  production  or  progress  in 
this  department  differs  in  any  way  from  others,  specify 
how. 

47.  How  are  parts,  belonging  to  repair  jobs,  stored 
and  marked? 

48.  Are  any  samples  made  for  show-rooms,  demon- 
stration or  salesmen?  If  so,  how  handled  as  to  account- 
ing? 

49.  Is  there  any  friction  or  dissatisfaction  of  any  sort? 
If  so,  explain. 

50.  Does  the  department  appear  to  be  efficient  as  a 
whole,  or  is  there  an  indication  of  laxity? 

51.  Obtain  copies  of  all  forms. 

52.  Remarks. 

(8)  Repair  Department 

Examine  on  same  basis  as  manufacturing  departments. 

(9)  Foundry 

Apply  same  inquiries  as  used  for  manufacturing  de- 
partments as  far  as  they  will  fit,  and,  in  addition,  ascer- 
tain various  classes  of  moulding,  viz.,  machine,  snap,  floor, 
pit,  regular  bench,  etc.,  and  the  various  classes  of  output, 
the  character  of  mixtures,  if  mixtures  vary  in  same  melt, 
number  of  melts  per  week,  cleaning  process,  manner  of 
making  calculations  at  present,  manner  of  ascertaining 
production  and  waste  in  a  steel  foundry,  whether  work  is 


ISO 


COST    ACCOUNTING 


planned  in  advance,  whether  flasks,  rigging  and  tools  are 
cared  for  and  placed  conveniently  for  use,  whether  iron 
or  wooden  flasks  are  used,  noting  any  special  methods  of 
moulding,  condition  of  cupolas,  furnaces  or  other  equip- 
ment, etc. 

(lo)  Plating-room 

Same  inquiries  as  for  manufacturing  departments  to 
be  used  wherever  applicable.  Ascertain  whether  anodes 
or  salts  are  used  and  how  consumption  and  amount  of 
deposit  is  ascertained.  Note  any  special  processes,  and 
also  quantities  of  small  pieces  immersed  on  one  hanger, 
difficulties  encountered,  etc. 

(ii)  Wood- working  Shops 

The  same  line  of  investigation  as  outlined  for  manu- 
facturing departments  should  be  pursued,  bearing  in  mind 
that  wastes  and  consumption  are  the  most  puzzling 
features  of  such  departments  or  plants.  Ascertain  par- 
ticularly from  an  accounting  standpoint  the  methods  em- 
ployed for  determining  consumption,  and  the  treatment 
of  wastes  suitable  for  further  use. 

(12)  Assembling 

1.  State  fully  nature  of  work  performed  in  this  de- 
partment and  methods  pursued. 

2.  If  any  packing  is  done  here,  describe  it,  and  furnish 
information  as  under  "Packing  Department." 

3.  How  many  employees,  and  how  distributed? 

4.  Does  piece  or  day  rate  plan  prevail? 

5.  Is  work  done  by  individuals  or  by  teams? 

6.  What  record  of  time  is  kept? 

7.  Is  department  efficient,  or  otherwise  ? 

8.  If  otherwise,  how  can  condition  be  remedied? 


THE    EXAMINATION    OF    A    PLANT 


151 


9.  Are  there  any  machines  or  mechanical  appHances? 
If  so,  list  them  and  describe  uses. 

10.  Is  any  final  inspection  or  test  made  here? 

11.  How  is  the  product  disposed  of  after  its  comple- 
tion ? 

12.  Obtain  copies  of  all  forms  and  books  used. 

13.  Remarks. 

(13)  Packing  Department 

1.  What  sort  of  package  and  packing  materials  are 
used? 

2.  Are  packages  made  or  bought? 

3.  How  are  packing  materials,  nails,  twine,  wire,  etc., 
taken  out  of  stores;  i.  c,  by  requisition  or  otherwise? 

4.  How  are   values   of  above   ascertained,   and   how 
applied  to  shipments? 

5.  Number  of  employees  and  their  duties. 

6.  How  is  time  recorded  and  applied? 

7.  How  are  deliveries  made  to  shipping  department 
and  how  accounted  for? 

8.  Obtain  copies  of  all  forms  used. 

9.  Remarks. 

(14)  Shipping  Department 

1.  How  are  shipments  checked  out? 

2.  What  records  are  kept  and  what  reports  are  made 
to  general  office? 

3.  Are  shipments  made  from  own  siding  or  trucked  to 
railroad  stations? 

4.  How  are  partial  shipments  handled? 

5.  Any  mechanical  aids? 

6.  How  many  employees  and  their  duties? 

7.  Obtain  copies  of  all  forms  and  books. 

8.  Remarks. 


152 


COST  ACCOUNTING 


(15)  Sales  Division 

1.  Explain  manner  of  selling  product. 

2.  Amount  of  sales  annually? 

3.  Are  sales  evenly  distributed  over  the  year,  or  are 
they  made  in  seasons?    Explain. 

4.  Are  sales  classified,  and,  if  so,  how? 

5.  Are   any  branch  warehouses,   offices   or  agencies 
maintained?    If  so,  describe,  and  how  handled. 

6.  Any  mail  order  business?    Explain  plan,  if  any. 

7.  Any  retail  department  ?    Describe  how  handled. 

8.  How  many  salesmen  employed — on  salary  or  com- 
mission? 

9.  Any  records  of  salesmen  by  territory? 

10.  Any  records  of  profits  on  sales  of  each  man  as 
above? 

11.  Are  statistics  as  to  sales  and  salesmen  compiled 
regularly  or  only  at  intervals? 

12.  Any  advertising  plan?  Describe  it  and  the  records 
kept. 

13.  Describe  follow-up  system,  if  any. 

14.  Describe  filing  system. 

15.  Describe  freight  rate  records,  if  any. 

16.  Give  office  force  and  duties  of  each. 

17.  Obtain  copies  of  all  forms  or  books,  including 
route  lists,  salesmen's  reports,  expense  accounts,  quotation 
records,  etc. 

18.  Remarks. 

(16)  General 

1.  Capital  stock?    Is  it  common,  preferred,  or  both? 

2.  Any  unissued  or  treasury  stock? 

3.  Any   bonded,    mortgage  or  other   funded   debt? 
State  class. 


THE   EXAMINATION    OF   A    PLANT 


153 


4.  Give  names  of  ofticers  or  members  of  firm  and  their 
duties. 

5.  What  records  are  kept  by  each,  aside  from  those 
mentioned  below? 

6.  Give  heads  of  departments  in  general  office  and 
their  duties. 

7.  What  records,  if  any,  are  kept  by  each? 

8.  Any  friction  between  officers  or  heads  of  divisions? 
Causes. 

9.  Any  lack  of  organization  or  facilities  in  general 
office? 

10.  Mail  and  correspondence — how  handled? 

11.  Stamps — how  handled  and  controlled? 

12.  Filing  and  card  index  system,  and  how  handled? 

13.  Divisions,  number  of  employees  in  each  and  their 
duties. 

14.  Forms  and  books  used  in  each  division,  with  ex- 
planation as  to  how  used. 

15.  Methods  of  accounting,  including  basis  of  closing, 
and  ascertaining  of  profit  and  loss. 

16.  Classification  of  accounts,  with  explanations. 

17.  Billing  system — explain  fully. 

18.  Collection  methods  and  records. 

19.  Stationery  records  as  to  costs  and  manner  of  issue. 

20.  Are  any  plant,  pattern,  tool  or  employees'  records 
maintained?    If  so,  explain. 

21.  Pay-roll,  how  made  up?  Are  receipts  taken  from 
employees?  Explain  with  reference  to  both  office  and 
factory. 

22.  Do  manufacturing  accounts  interlock  with  general 
ledger? 

23.  Is  clerical  work  up  to  standard  and  kept  up  to  date  ? 

24.  Is  there  any  cost  system  in  operation?  If  so, 
obtain  full  particulars,  especially  with  reference  to  methods 


154  COST   ACCOUNTING 

of  distributing  shop-burden  and  general  overhead,  and 
method  or -routine  of  collecting  and  tabulating  figures  to 
obtain  costs. 

25.  What  objections  are  offered,  if  any,  against  the 
introduction  of  improved  accounting  and  efficiency 
methods? 

26.  Remarks. 

The  method  employed  to  record  the  information  ob- 
tained from  the  physical  examination  of  a  plant  depends 
entirely  upon  the  individual  conducting  the  examination; 
but  a  convenient  plan  is  for  the  examiner  to  spend  the 
forenoon  of  the  day  in  the  examination  of  one  or  more 
departments,  making  notes  of  the  information  received, 
and  in  the  afternoon  to  write  up  in  detail  the  result  of  the 
examination.  Thus  it  is  possible  to  review  the  morning's 
work  while  the  details  are  still  fresh  in  mind,  and  to  add 
any  information  that  may  have  been  overlooked  in  the 
first  place. 


I 


CHAPTER  XI 

DEVISING   A    COST    SYSTEM 

Co-operation  of  Management  and  Employees 

After  the  plant  has  been  thoroughly  examined,  and  all 
the  information  has  been  classified  according  to  the  different 
phases  of  cost-finding,  the  next  problem  is  to  devise  a  system 
that  will  perform  its  twofold  function  and  at  the  same 
time  be  practical  in  its  workings.  There  are  often  many 
conditions  outside  of  the  manufacturing  part  of  the  plant 
that  have  an  important  bearing  on  the  situation.  Not  least 
among  these  is  the  disposition  of  the  manufacturer  himself 
and  his  assistants.  It  is  next  to  useless  to  try  to  install  a 
system  that  is  going  to  be  regarded  with  suspicion  and 
criticism  before  it  has  had  a  chance  to  prove  its  worth.  To 
get  the  best  results  the  co-operation  of  the  whole  force  is 
needed. 

The  foremen  and  department  heads  are  often  the  most 
persistent  objectors,  as  they  are  likely  to  regard  the  installa- 
tion of  a  cost  system  as  an  invasion  of  their  territory.  They 
are  right  to  the  extent  that  the  system  provides  an  effective 
means  of  examining  their  work  and  measuring  their  effi- 
ciency, in  a  way  that  cannot  be  done  by  personal  inspection. 
The  usual  shortcomings  of  a  foreman  are  to  be  found  in  his 
failure  to  plan  ahead  properly  and  lay  out  work  for  the  men 
under  him,  and  the  time  reports  will  show  his  deficiencies 
in  this  respect.  To  illustrate,  the  time-clock  cards  may  show 
that  the  men  were  present  900  hours  during  a  week,  while 
155 


156  COST   ACCOUNTING 

the  time  reports,  which  indicate  the  time  spent  on  jobs,  rtiay 
show  only  800  hours  for  the  same  week.  Under  a  cost 
system  this  cross-checking  of  time  records  should  never  be 
omitted;  and  if  a  difference  exists,  the  foreman  should  be 
called  upon  to  explain  the  discrepancy. 

Fitting  the  System  to  Existing  Conditions 

Much  depends  on  whether  the  employer  is  willing  to 
engage  a  special  cost  clerk  or  not.  If  the  work  is  to  be 
undertaken  by  the  regular  office  force,  the  system  must  be 
one  they  can  handle ;  and  this  involves  a  very  simple  system 
when  the  office  clerks  are  not  particularly  capable.  More 
will  be  accomplished  by  generalizing  results  in  such  cases 
than  by  putting  in  a  complete  system,  which  is  bound  to 
break  down  because  the  clerical  force  cannot  handle  it. 

In  other  words,  the  cost  accountant  must  work  along 
the  lines  of  least  resistance,  and  begin  v^-ith  as  simple  a 
system  as  possible,  amplifying  this  and  adding  new  features 
as  the  conditions  allow.  This  is  the  reason  for  introducing 
at  first  an  "Estimating"  system,  which  will  serve  its  own 
purpose  and  also  soon,  show  where  more  complete  methods 
should  be  applied.  The  size  of  the  plant  and  complexity  of 
the  work  will  of  course  have  some  influence  on  the  system, 
both  in  the  beginning  and  during  its  growth.  It  cannot  be 
hoped  that  an  elementary  installation  will  give  satisfactory 
results  where  there  are  many  varieties  of  articles  manu- 
factured, or  where  the  processes  are  numerous  or  involved. 

The  growth  of  a  system  is  not  necessarily  toward  com- 
plexity. Very  often,  after  a  factory  is  well  organized  and 
the  efficiency  work  of  the  cost  system  beginning  to  show 
results,  features  that  were  at  first  treated  separately  may 
be  included  in  larger  units,  and  much  detail  labor  avoided. 
The  system  at  first  must  fit  existing  conditions ;  but  one  of 
the  objects  in  view  is  to  change  conditions  for  the  better, 


DEVISING    A    COST    SYSTEM  1^7 

and  when  this  is  done  the  system  itself  may  be  changed 
accordingly.  There  are  conditions,  too,  that  remain  com- 
paratively constant  from  year  to  year;  and  when  a  cost 
(System  has  obtained  the  results  by  detailed  methods  for  one 
or  two  years,  that  part  of  the  system  may  be  dropped  and 
the  results  considered  as  a  constant  quantity.  There  is 
little  benefit  in  verifying  established  data,  especially  if  the 
verification  is  involved  or  expensive  and  can  be  accomplished 
approximately  by  other  means. 

Red  Tape 

Whatever  kind  of  system  is  devised,  every  precaution 
should  be  taken  to  avoid  making  it  top-heavy.  If  there  is 
one  thing  more  than  another  that  excites  criticism,  it  is 
"red  tape"  that  does  not  justify  itself  in  practical  results. 
It  may  show  itself  in  a  mass  of  undigested  reports,  trouble- 
some to  make  up  in  the  shop  and  impracticable  to  use  in 
the  office,  or  it  may  take  the  form  of  volumes  of  data  that 
no  one  ever  looks  at.  Another  form  of  red  tape,  not  un- 
common, is  carrying  small  items  of  cost  to  such  a  degree 
that  the  process  of  determining  them  is  more  expensive  than 
the  costs  themselves. 

In  avoiding  these  pitfalls,  the  cost  expert  will  sometimes 
appear  to  be  violating  the  fundamental  principles  of  cost- 
finding,  when,  as  a  matter  of  fact,  he  is  only  preventing  them 
from  going  to  seed.  The  last  point  will  bear  illustration. 
In  manufacturing  straw  hats  the  material  costs  appear  under 
five  heads :  the  braid  or  straw,  the  band,  the  sweat — which 
is  the  leather  inside — the  trimmings,  and  the  thread.  Under 
a  special  order  system  the  only  practical  way  to  treat  the 
thread  is  to  put  it  in  the  general  indirect  expenses  and  dis- 
tribute it  over  the  hats  without  regard  to  their  grade  or 
value.  The  expense  of  finding  the  cost  of  the  thread  enter- 
ing into  any  particular  grade  of  hats  would  be  greater  than 


1^8  COST    ACCOUNTING 

the  cost  of  the  thread  itself.     Similar  instances  can  be  cited 
in  many  industries. 

Reports  for  Executives 

The  systematizer  must  keep  in  mind  what  the  practical 
objects  and  purposes  of  the  cost  system  really  are.  The 
system  itself  is  not  the  result;  it  is  only  the  means  by  which 
results  are  obtained. 

If  the  cost  system  is  to  be  the  measure  of  shop  efficiency, 
thought  will  have  to  be  given  to  the  form  in  which  the  re- 
sults should  appear.  The  record  to  be  used  to  show  these 
final  results  is  the  comparative  analytical  statement  prepared 
at  the  end  of  every  cost  period,  in  which  the  expenses  are 
classified.  The  comparison  may  be  made  by  parallel  columns 
or  by  comparing  different  sheets.  Sometimes  the  various 
expenses  are  plotted  on  charts  so  as  to  show  at  a  glance  the 
upward  or  downward  tendency.  The  completeness  of  the 
classification  depends  upon  the  completeness  of  the  system, 
and,  as  stated  before,  this  depends  on  a  number  of  con- 
siderations. The  idea  is  that  the  manager  should  be  able 
to  put  his  finger  on  any  variations  in  any  item  of  expense 
relating  to  any  class  of  goods  or  to  any  department,  and 
either  know  the  cause  or  be  able  to  investigate  and  dis- 
cover it.  Not  only  can  variations  be  studied,  but  each  item 
may  be  considered  by  itself  with  the  idea  of  applying  a 
remedy  if  needed.  In  short,  an  adequate  report  of  cost  re- 
sults serves  as  the  key  to  the  whole  situation,  giving  the 
management  positive  knowledge  of  the  facts  as  they  are. 

Cost  Period 

One  feature  that  must  be  decided  before  actual  arrange- 
ments are  made  for  installing  a  system  is  the  cost  period. 
This  is  the  unit  of  time  for  which  costs  are  to  be  summarized 
and  reported,  and  usually  covers  a  month.     It  is  advisable 


DEVISING    A    COST    SYSTEM 


59 


to  have  the  cost  period  coincide  with  the  pay-roll  periods  as 
far  as  practicable,  so  that  the  closing  days  will  agree;  that 
is.  if  the  men  are  paid  by  the  week,  the  cost  period  may  be 
four  or  five  weeks.  In  this  way  calculation  of  wages  due 
but  not  yet  paid  will  be  avoided,  and  the  distribution  of 
costs  simplified. 

General  Outline  of  Systems 

The  systems  described  in  the  following  chapters  have 
been  selected  with  the  idea  of  illustrating  the  principles  of 
cost  accounting  applied  to  the  general  types  of  systems  out- 
lined in  Chapter  IV.  As  far  as  possible,  the  systems  have 
been  made  general  rather  than  specific,  in  order  to  provide 
for  flexibility  in  adapting  them  to  actual  conditions.  In  any 
particular  case  the  system  adopted  will  probably  require 
some  modification,  which,  while  not  affecting  its  general 
plan,  will  apply  its  principles  in  a  different  way.  The  aim 
in  each  instance  must  be  to  make  the  system  practical  in 
its  operation.  Much  of  the  opposition  and  criticism  that  cost 
systems  have  incurred  is  due  to  too  much  enthusiasm  and  too 
little  common  sense  in  their  planning.  The  system  has  been 
placed  ahead  of  the  business. 

There  is  nothing  presented  in  these  chapters,  in  the  way 
of  either  methods  or  designs,  that  has  not  met  with  success 
in  actual  operation.  They  do  not  merely  represent  what 
might  be  accomplished,  but  what  really  has  been  done. 

Estimating  Cost  Systems 

In  Chapter  XII  is  presented  a  graded  series  of  "Primary" 
or  "Estimating"  cost  systems,  which  will  locate  the  causes 
of  faulty  or  erroneous  estimates.  Besides  having  obvious 
values  of  its  own,  an  estimating  system  will  indicate  along 
what  lines  a  more  det^iiled  cost  system  should  be  applied,  if 
that   is   desirable.     As   an   efficiency  agent,   however,  the 


l6o  COST   ACCOUNTING 

estimating  system  is  of  little  use,  since  it  does  not  provide 
for  reporting  the  work  of  the  shop  in  detail. 

Departmental  System 

In  Chapter  XIII  methods  of  finding  the  cost  of  different 
classes  of  product  by  the  class  are  described  under  the  title 
"Departmental  System,"  the  word  "Departmental"  referring 
to  the  classification  of  product,  and  not  to  the  operating  de- 
partment. It  is  an  intermediate  step  between  the  primary 
or  estimating  and  the  complete  cost  system.  The  costs  of 
a  particular  class  are  found,  but  are  not  analyzed  beyond 
the  principal  divisions.  Under  such  a  system  the  danger 
is  that  some  articles  of  a  class  may  be  manufactured  at  a 
loss,  and  the  loss  be  concealed  by  the  profit  on  other  articles 
of  the  same  class,  while  the  class  as  a  whole  shows  a  profit. 
\\']ien  the  classification  is  simple  in  character,  however,  a 
departmental  system  may  often  be  used  to  great  advantage, 
since  much  of  the  detail  work  of  a  complete  system  is 
eliminated. 

Special  Order  and  Product  Systems 

The  four  systems  described  in  Chapters  XIV  to  XVII 
inclusive  illustrate  in  each  case  one  of  the  four  general  types 
referred  to  in  Chapter  IV.  The  descriptions  themselves 
are  given  from  an  accounting  standpoint,  since  the  system 
of  accounts  is  the  key  to  the  system  of  operations.  The  con- 
ditions to  which  each  system  applies  are  outlined  at  the 
beginning  of  the  chapter  in  which  the  particular  system  is 
described. 

To  avoid  confusion,  only  two  methods  of  distributing 
the  indirect  expenses  have  been  used,  the  direct  labor  cost 
and  new  machine  rate.  Each  method  is  given  in  connection 
with  both  a  "Special  Order  System"  and  a  "Product 
System."    If  the  principles  are  well  understood,  there  should 


DEVISING    A    COST    SYSTEM  l6l 

be  little  difficulty  in  changing  the  forms  and  classification 
of  accounts,  so  as  to  provide  for  any  other  method  of  ex- 
pense distribution. 

Attention  should  be  called  to  the  necessity  which  often 
exists  of  combining  different  methods  in  the  same  plant. 
For  instance,  in  either  a  stove  works  or  a  tannery  the  first 
few  operations  are  best  covered  by  a  product  system,  while 
at  a  certain  stage  the  manufacture  breaks  off  abruptly  into 
what  is  essentially  a  special  order  business.  There  are  also 
many  instances  where  part  of  a  plant  must  employ  a  pro- 
ductive labor  method,  while  the  rest  can  only  be  treated 
rationally  by  machine  rates.  Such  cases,  especially  the 
former,  call  for  considerable  ingenuity  in  welding  the  two 
systems  of  cost  accounts  into  one  without  loading  it  with 
extra  details. 

In  presenting  the  four  cost  systems,  no  attempt  has  been 
made  to  include  all  the  organization  forms,  some  of  which 
are  essential  for  a  cost-finding  system  conducted  on  a 
systematic  basis.  The  systems  as  presented  are  intended  to 
illustrate,  as  far  as  possible  and  without  too  great  detail, 
the  best  methods  for  compiling  the  cost  data  intelligently 
and  accurately  and  interlocking  the  cost  accounts  with  the 
general  books. 

In  explaining  and  describing  the  forms  for  gathering 
and  compiling  the  cost  data  in  the  different  systems,  some 
repetition  has  been  unavoidable  in  explaining  the  applica- 
tion of  the  same  principles  or  forms  under  different  con- 
ditions. Where  such  repetition  occurs,  it  is  only  for  the 
purpose  of  making  the  matter  clear  without  too  frequent 
reference  to  other  parts  of  the  book. 

Charts  of  Cost  Systems 

The  charts  of  the  four  cost  systems,  which  appear  in 
connection  with  the  descriptions  of  these  systems,  are  de- 


l62  COST    ACCOUNTING 

signed  to  show  in  concise  form  the  course  of  the  entries  on 
all  records  and  accounts  affected.  These  charts,  in  connec- 
tion with  the  explanations  of  the  forms  and  records,  give  a 
clearer  and  more  comprehensive  understanding  of  the 
detailed  workings  of  the  system  than  could  be  obtained 
otherwise. 

The  charts  are  each  divided  into  three  main  divisions, 
showing : 

(i)  A  general  description  and  classification  of 
the  entries  which  affect  both  the  subsidiary  and  the 
controlling  records 

(2)  The  course  of  the  entries  on  the  subsidiary 
forms  and  records 

(3)  The  method  of  control,  and  the  entries  affect- 
ing the  controlling  records 


General  Description  of  Entries 

The  entries  of  a  cost  system  may  be  classified  under  six 
divisions : 

(i)  Authorizing  the  purchase  of  materials  and 
supplies,  and  the  incurring  of  other  expenditures 

(2)  Receiving,  storing  and  requisitioning  of 
raw  material  and  supplies 

(3)  Putting  raw  material  into  operation 

(4)  The  compilation  of  cost  data  on  the  cost 
sheet 

(5)  The  transfer  of  finished  parts  or  finished 
stock  to  their  respective  stock  records,  and  also  the 
transfer  of  part-finished  stock  back  into  operation  to 
be  completed 

(6)  The  shipment  and  sale  of  finished  stock  or 
part-finished  stock,  and  also  the  return  of  finished 


I 


DEVISING    A    COST    SYSTEM  163 

stock   or  part-finished   stock,    including   the   entries 
upon  the  register  of  sales  and  costs 


By  means  of  these  six  classifications,  one  can  very  readily 
see: 

(i)   The  detail  records  affected 

(2)   The  controlling  accounts  affected 

Subsidiary  Records 

The  subsidiary  records  on  the  charts  are  represented  by 
rectangles  upon  which  are  entered  the  names  of  these 
records  and  also  their  numbers. 

The  course  of  the  entries  upon  the  subsidiary  records  is 
denoted  by  means  of  arrows  which  show : 

(i)   The  source  from  which  the  information  is 
obtained ;  and 

(2)   The  disposition  of  the  information 

Method  of  Control 

The  division  of  the  charts  on  which  appears  the  method 
of  control  of  the  subsidiary  records  is  classified  so  as  to  show 
the  posting  medium,  the  factory  ledger  accounts  affected — 
if  a  factory  ledger  is  used — and  the  general  ledger  accounts 
affected. 

Under  the  caption  "Posting  Medium,"  those  records  are 
mentioned  from  which  postings  to  the  factory  ledger  and 
general  accounts  may  be  made.  It  should  be  borne  in  mind, 
however,  that  the  entries  affecting  the  factory  ledger  may 
be  entered  in  a  cost  journal,  and  postings  may  then  be  made 
from  that  source. 

Under  the  captions  showing  the  accounts  affected  the 
entries  are  in  journal  entry  form. 


l64  COST    ACCOUNTING 

Forms  and  Designs 

When  it  comes  to  the  question  of  choosing  or  designing 
the  forms  to  be  used  in  any  particular  case,  it  is  impossible 
to  exercise  too  great  care  and  foresight.  The  matter  is  one 
that  cuts  deeper  than  is  apparent  at  the  first  glance.  Funda- 
mentally, a  form  is  determined  by  the  question,  "What  do  I 
want  to  know?"  Not  only  the  form  but  the  system  to  be 
adopted  depends  on  the  answer  to  this  question.  The  next 
question  is,  "How  can  the  facts  best  be  obtained,  summarized 
and  arranged,  so  as  to  get  the  most  out  of  them  with  the 
least  trouble  and  expense?" 

This  cannot  be  answered  until  the  type  of  system  to  be 
installed  has  been  decided  upon.  The  whole  system  should 
be  arranged  so  that  its  several  parts  will  fit  in  the  scheme 
naturally  and  conveniently. 

Forms  have  not  been  provided  in  all  cases  for  sum- 
marizing purposes.  In  many  cases  this  may  be  done  on  the 
form  upon  which  the  original  data  is  compiled,  and  where 
this  is  not  practicable,  blank  paper  with  ruled  columns  will 
answer  the  purpose. 

The  forms  for  gathering  the  data  at  first  hand  should 
be  designed  with  the  idea  of  getting  the  necessary  informa- 
tion with  the  least  disturbance  to  the  workmen  and  to  shop 
routine  consistent  with  accuracy. 

Forms,  as  a  whole,  may  be  arranged  so  that  they  may 
be  used  for  more  than  one  purpose.  For  instance,  the 
material  requisition  sheet  is  customarily  made  out  to  show 
the  amount  and  cost  of  material  entering  into  any  given 
production  order,  but  the  information  recorded  there  may 
be  just  the  information  needed  in  connection  with  keeping 
a  stock  record.  This  double  purpose  of  the  form  is  accom- 
plished either  by  making  the  form  more  general  or  inclusive 
in  design,  or  by  making  extra  copies.     In  actual  practice  the 


DEVISING    A    COST    SYSTEM  1 65 

scope  of  forms  is  limited  by  their  respective  uses.  That  is, 
the  same  data  should  not  be  collected  over  and  over  again. 
The  forms  as  described  in  this  book  overlap  because  it  is 
necessary  to  show  what  uses  can  be  made  of  each  form — 
not  what  uses  should  be  made. 

The  forms  submitted  are  limited  in  number ;  and  with 
this  in  mind,  they  have  been  carefully  selected  rather  as 
suggestions  to  work  from,  than  as  examples  from  which  to 
choose. 

A  careful  inspection  and  comparison  of  related  forms  will 
often  suggest  the  minor  changes  necessary  to  adapt  them 
to  other  kinds  of  systems.  Adding  a  new  column  or  chang- 
ing the  classifications  will  often  enlarge  the  scope  of  a  form 
more  than  would  seem  possible. 

No  attempt  has  been  made  to  explain  completely  all  the 
functions  that  each  design  could  perform,  the  object  being 
to  cover  only  the  main  functions  it  performs  in  the  system 
under  consideration.  Wherever  more  information  is  de- 
sired as  to  the  general  use  and  purpose  of  any  particular 
form  than  is  given  in  the  system  described,  reference  should 
be  made  to  the  chapters  relating  to  the  recording  and  com- 
piling of  the  cost  data.* 

The  forms  presented  in  Chapters  XVIII  to  XXII,  in- 
clusive, are  also  supplied  under  separate  binding,  so  that  the 
reader  may  have  them  conveniently  before  him  when  they 
are  to  be  consulted  in  connection  with  the  text. 


•Chapters  VII,  VIII. 


CHAPTER  XII 

ESTIMATING    COST    SYSTEMS 

Purpose  and  Kinds 

The  estimating  cost  system  is  used  for  verifying  esti- 
mates of  the  cost  of  production  and  for  locating  mistakes  in 
the  estimates.  How  well  its  purpose  is  realized  depends 
on  the  degree  of  refinement  with  which  the  estimates  are 
made  and  on  the  records  kept  to  verify  them.  Three  plans 
or  grades  of  estimating  systems  are  presented  here,  ranging 
in  scope  as  follows  : 

( 1 )  Verification  of  estimates  on  the  total  amounts 
of  the  material,  labor,  and  indirect  expense 

(2)  Verification  of  estimates  on  material  and 
labor  classified  by  departments  or  operations,  together 
with  the  total  indirect  expenses  not  classified 

(3)  Verification  of  estimates  on  each  class  of 
product  according  to  departmental  material,  labor  and 
indirecfexpenses 

Advantages 

The  good  features  of  estimating  cost  systems  are  three 
in  number.  First,  the  clerical  work  is  comparatively  small 
compared  with  that  involved  in  a  complete  system ;  second, 
the  estimating  system  often  discloses  weak  spots  in  the 
estimates,  and  indicates  where  complete  methods  should  be 
introduced ;  and  third,  it  may  be  used  with  good  success  in 
166 


I 


ESTIMATING    COST    SYSTEMS  167 

small  factories,  or  in  larger  plants  where  the  product  does 
not  represent  a  wide  variety  of  articles. 

First  Plan  of  Estimating  Costs 

In  the  simplest  and  most  elementary  estimating  cost 
system,  there  are  but  three  forms  used : 

( 1 )  Schedule  of  Estimated  Costs 

(2)  Inventory  Sheet 

(3)  Analysis  of  Cost  of  Sales 

Schedule  of  Estimated  Costs  (Form  52) 

This  form  is  specific  in  character,  and  provides  for  the 
total  estimated  cost  of  each  kind  of  article  manufactured, 
divided  into  the  three  elements,  material,  labor  and 
indirect  expense.  The  estimates  that  appear  in  this  schedule 
are  to  be  used  in  pricing  the  inventory  and  cost  of  sales. 
The  figures  should  remain  constant  until  the  verification  has 
shown  them  to  be  inaccurate,  when  they  should  be  revised, 
and  the  revised  figures  used  at  the  beginning  of  the  new 
period. 

The  form  may  be  provided  with  extra  columns  to  show 
variations  from  period  to  period  in  the  elements  of  cost ; 
but  such  variations  should  not  be  incorporated  in  the  other 
forms  of  the  system  until  a  new  inventory  is  taken  at  the 
beginning  of  a  new  period. 

Inventory  Sheet  (Form  61) 

The  "Inventory  Sheet,"  based  on  the  schedule  of  esti- 
mated costs,  shows  the  estimated  cost  value  of  all  the  product 
in  the  plant  divided  into  its  elements ;  that  is,  material, 
labor  and  indirect  expenses.  In  the  case  of  raw  material, 
the  cost  appears  only  in  the  material  column.  The  cost  of 
articles  in  process  is  estimated  as  closely  as  possible.     The 


l68  COST   ACCOUNTING 

errors  that  may  exist  in  such  an  estimate  will  probably  l^e 
cancelled  by  the  same  errors  in  the  ending  inventory,  and 
will  not  be  appreciable  unless  there  is  a  great  difference  in 
the  amount  of  materials  in  process  in  the  two  inventories. 

The  totals  of  the  three  elements  of  cost  are  posted  from 
the  inventory  sheet  to  the  ledger  to  the  debit  of  their  re- 
spective accounts  at  the  beginning  of  the  period,  and  serve 
to  open  these  accounts  upon  the  books. 

Analysis  of  Cost  of  Sales  (Form  65) 

In  order  that  the  estimates  may  be  verified,  a  record 
must  be  kept  of  all  articles  sold  and  the  quantity  of  each, 
this  information  appearing  on  the  analysis  of  cost  of  sales. 
The  costs  of  the  articles  are  entered  and  classified  on  the 
analysis  of  cost  of  sales  in  the  same  way  as  the  costs  on  the 
inventory  sheet.  By  adding  the  several  columns,  the  total 
of  each  element  of  cost  as  estimated  is  shown  for  each  article 
sold. 

Verification  Under  First  Plan 

It  will  be  noticed  that  the  totals  of  each  of  the  elements 
of  cost  are  debited  to  their  respective  accounts  from  the  in- 
ventory sheet  at  the  beginning  of  the  period.  During  the 
period  all  expenditures  for  material,  labor  and  expense 
should  be  charged  against  the  proper  accounts ;  and  in  doing 
this  great  care  must  be  exercised  to  keep  the  original  classi- 
fication unchanged ;  i.  e.,  the  items  charged  to  the  labor  or 
indirect  expense  account  must  include  only  the  items  that 
were  considered  as  labor  and  indirect  expense  charges  in 
making  the  schedule  of  estimated  costs.  If  there  is  any 
change  in  the  classification,  the  validity  of  the  whole  plan  is 
destroyed.  Only  the  totals  need  be  considered  in  posting 
to  the  accounts  for  material,  labor  and  indirect  expense. 

It  is  clear  that  the  debit  side  of  the  three  accounts  rep- 


ESTIMATING    COST    SYSTEMS 


169 


resents  the  estimated  value  of  the  inventory  at  tlie  beginning 
of  the  period,  plus  the  actual  expenditures  relating  to  these 
accounts  for  the  period. 

The  totals  of  the  material,  labor  and  indirect  expense 
columns  on  the  analysis  of  cost  of  sales  are  credited  to  their 
respective  accounts  in  the  ledger.  The  balance  of  these 
accounts  will  be  in  effect  a  book  inventory  classified  in  the 
same  way  as  before,  and  based  partly  on  the  estimated  be- 
ginning inventory,  and  partly  on  the  actual  charges  incurred 
during  the  period.  The  next  step  is  to  take  an  actual  in- 
ventory at  the  end  of  the  period  based  on  the  schedule  of 
estimated  costs. 

It  is  obvious  that  the  book  inventory  will  agree  with  the 
physical  inventory  if  the  estimates  are  correct.  Any  differ- 
ence shown  between  the  two  is  due  to  inaccuracies  in  the 
estimates.  If  any  element  in  the  book  inventory  exceeds  the 
corresponding  element  in  the  physical  inventory,  it  show^s 
that  the  estimated  costs  were  too  low  as  regards  that  element, 
and  if  the  reverse,  the  estimated  costs  were  too  high,  pro- 
vided of  course  that  there  has  not  been  any  theft  or  waste  of 
the  stock. 

The  manufacturer  must  judge  from  the  amount  of  the 
differences  where  the  trouble  lies,  and  to  what  extent  the 
estimates  should  be  revised.  For  instance,  if  the  material 
costs  are  considerably  underestimated,  it  is  probable  that 
leaks  of  considerable  importance  exist  in  the  methods  of 
handling  and  safeguarding  the  material,  or  that  wastes 
occur  in  the  processes.  If  the  estimates  for  labor  are  much 
too  low,  the  cause  may  lie  in  the  classification  of  labor;  that 
is,  labor  that  is  really  direct  may  have  been  classed  as  in- 
direct. The  principal  difference,  however,  is  almost  always 
found  in  the  indirect  expense  account,  since  comparatively 
few  manufacturers  calculate  all  the  phases  of  overhead  cost 
in  their  estimates. 


I-o  COST   ACCOUNTING 

If  the  cause  of  the  differences  cannot  be  found,  the 
estimates  should  be  revised  on  the  basis  of  the  known  con- 
ditions. No  method  of  revision  will  give  the  exact  figures, 
but  if  the  difference  between  any  corresponding  elements  in 
the  book  inventory  and  physical  inventory  be  divided  by  the 
number  of  units  of  product  manufactured  during  the  period, 
the  result  will  be,  approximately,  the  amount  to  be  added  to 
or  subtracted  from  the  original  estimates  relating  to  that 
element.  This  rule  is  fairly  accurate  provided  no  changes 
have  occurred  in  the  methods  and  routine  of  manufacture 
since  the  original  estimate  was  made. 

When  the  material,  labor  and  indirect  expense  accounts 
are  credited  from  the  analysis  of  cost  of  sales,  the  total  of 
the  three  elements  as  shown  by  the  total  column  on  the 
analysis  of  cost  of  sales  is  debited  to  the  Sales  account.  The 
balance  of  the  Sales  account  will  then  be  the  estimated  gross 
profit  or  loss.  If  the  book  inventory  exceeds  the  physical 
inventory,  showing  that  the  estimates  were  too  low,  the 
difference  should  be  credited  to  the  Inventory  account  ac- 
cording to  its  proper  classification,  and  charged  against  the 
Sales  account.  If  the  estimates  were  too  high,  the  entry 
would  be  reversed ;  i.  c,  the  Inventory  account  should  be 
debited,  and  the  Sales  account  be  credited.  The  balance  in 
the  Sales  account  will  then  show  the  true  gross  profit  or 
loss  instead  of  the  estimated  figure. 

Monthly  statements  may  be  prepared  based  on  the  esti- 
mated costs,  the  differences  being  adjusted  at  the  end  of  the 
inventory  period.  The  monthly  statement,  however,  is  likely 
to  be  misleading  unless  the  estimates  are  fairly  accurate. 

If  such  a  system  of  verifying  and  revising  estimates  is 
followed  up,  it  will  sooner  or  later  bring  the  estimates  close 
to  the  true  costs.  But  it  will  often  be  necessary  to  locate 
and  correct  seeming  inaccuracies  in  the  cost  estimates.  To 
do  this,  the  estimates  will  have  to  be  made  by  departments  or 


ESTIMATING    COST    SYSTEMS 


171 


operations,  and  the  plan  of  verification  will  have  to  be  ex- 
tended to  meet  the  divisions  in  the  estimates. 

Second  Plan  of  Estimating  Costs 

The  second  plan  provides  for  the  departmental  classifi- 
cation of  material  and  labor;  but  in  order  to  avoid  the 
clerical  work  necessary  for  distributing  and  determining  de- 
partmental indirect  expenses,  that  element  is  still  treated  as 
an  unclassified  whole,  covering  the  entire  factory. 

The  "  Schedule  of  Estimated  Costs,"  "Inventory  Sheet," 
and  "Analysis  of  Cost  of  Sales,"  are  used  in  the  same  way 
as  before,  but  the  material  and  labor  estimates  are  divided 
into  as  many  sub-heads  as  there  are  departmental  classifi- 
cations. 

To  accomplish  this,  the  follow^ing  additional  details 
should  be  shown  on  the  three  forms  used  in  the  first  esti- 
mating method.  On  the  inventory  sheet  should  appear  the 
heading  "Department" ;  and  columns  should  be  ruled  under 
the  captions  "Material"  and  "Labor"  for  the  number  of 
operations  under  each  classification,  and  also  a  column  for 
indirect  expenses  and  a  column  for  the  total  cost.  The  same 
captions  and  columns  should  appear  on  the  schedule  of 
estimated  costs  and  analysis  of  cost  of  sales. 

Besides  these  three  forms,  the  system  requires  a  purchase 
journal  and  a  pay-roll  form  for  dissecting  and  arranging  the 
material  and  labor  cost. 

Purchase  Journal  (Form  5) 

When  purchases  of  material  are  made,  they  are  classified 
in  the  purchase  journal  according  to  the  sub-divisions  under 
the  head  of  "Material."  The  purchases  are  credited  to  the 
accounts  of  the  creditors  and  charged  in  total  at  the  end  of 
the  month  or  period  to  the  account  appearing  at  the  head  of 
the  column. 


172 


COST    ACCOUNTING 


Pay-Roll  (Form  38) 

The  entries  on  the  pay-roll  are  classified  into  direct  labor 
for  each  operating  department,  and  columns  are  also  added 
to  show  the  indirect  labor,  supervision,  etc.  The  totals  of 
the  direct  labor  columns  are  debited  to  the  department  labor 
accounts ;  and  the  totals  of  the  other  columns  are  charged  to 
the  proper  accounts  under  indirect  expenses.  If  certain  items 
of  indirect  labor  are  made  a  part  of  the  estimates  for  labor 
cost,  these  items  must  be  separated  from  the  rest  and  entered 
under  the  same  labor  classification  as  in  the  estimates.  Other- 
wise the  comparison  will  not  show  dependable  results. 

Verification  Under  Second  Plan 

The  plan  of  verification  is  the  same  as  in  the  first 
system,  and  precisely  the  same  steps  are  followed  in  locating 
and  adjusting  discrepancies.  The  only  different  feature  is 
the  number  of  accounts  involved.  By  using  the  department 
accounts,  sources  of  errors  and  leaks  are  often  located  that 
would  be  concealed  in  the  first  plan. 

While  the  system  of  cost-finding  just  described  localizes 
costs  to  some  extent,  there  are  many  important  facts  that  it 
does  not  disclose.  For  example,  it  may  be  known  that  a 
profit  is  being  made  on  the  product  as  a  whole,  but  it  may 
also  be  suspected  that  certain  articles  or  classes  of  product 
are  being  sold  at  a  loss,  and  that  this  loss  is  being  paid  out 
of  the  profits  on  other  goods.  This  is  a  condition  existing 
so  often  that  it  may  almost  be  said  to  be  prevalent. 

Third  Plan  of  Estimating  Costs 

The  third  estimating  system  is  devised  to  solve  the 
problem  just  mentioned  by  making  an  analysis  of  estimates, 
primarily  by  class  of  product,  and  secondarily  by  operating 
department.     As  might  be  expected,  there  is  considerably 


ESTIMATING    COST    SYSTEMS  1 73 

more  detail  work  than  in  the  other  two  plans,  although  the 
underlying  principle  of  verification  is  the  same. 
The  forms  used  are : 

Schedule  of  Estimated  Costs 

Inventory  Sheet 

Analysis  of  Cost  of  Sales 

Purchase  Journal 

Material  Requisition 

Summary  of  Material  Requisitions 

Time  Report 

Pay-Roil 

Schedule  of  Estimated  Costs 

The  "Schedule  of  Estimated  Costs"  is  the  same  in  de- 
sign as  that  used  in  the  second  plan,  the  sub-heads  under 
"Material"  and  "Labor"  referring  to  different  operating 
departments.  The  estimates,  however,  are  classified  accord- 
ing to  the  nature  of  the  article. 

Inventory  Sheet 

The  "Inventory  Sheet"  is  the  same  form  as  the  one  used 
in  the  second  plan,  but  separate  inventory  sheets  are  used 
for  each  class  of  product,  and  the  raw  material  not  yet  put 
in  process  is  not  included  in  any  class,  but  is  inventoried  by 
itself.  The  total  amount  of  raw  material  is  charged  to  a 
separate  account  in  the  ledger,  and  this  account  is  credited 
with  the  raw  material  drawai  out  on  material  requisitions. 

The  finished  and  part-finished  stock  are  entered  as 
before,  each  article  on  its  proper  sheet.  The  totals  appear- 
ing on  each  inventory  sheet  then  represent  the  total  esti- 
mated cost  of  all  articles  belonging  to  that  class  of  product. 

An  account  is  opened  in  the  ledger  with  each  class  of 
product,  and  with  the  various  sub-divisions  of  expenditures 


174 


COST   ACCOUNTING 


relating  to  it,  viz. :   the  departmental  accounts  for  material 
and  labor,  and  one  account  for  indirect  expenses. 

Analysis  of  Cost  of  Sales 

This  form  is  the  same  as  that  used  in  the  second  plan ; 
but  separate  sheets  are  used  for  each  class  of  product,  and 
the  inventory  classification  must  be  rigidly  adhered  to. 

Purchase  Journal  (Form  5) 

This  record  is  to  be  used  for  the  purpose  of  entering 
invoices  for  goods  purchased,  and  differs  from  the  form 
used  in  the  preceding  plan  only  to  the  extent  that  one  column 
for  raw  material  is  used  in  place  of  several,  as  material 
requisitions  are  to  be  used  in  connection  with  this  plan.  All 
material  purchased  can  now  be  charged  to  one  account,  the 
distribution  to  the  respective  departments  being  made  from 
the  material  requisitions.  The  total  purchases  of  material 
for  the  month,  exclusive  of  supplies  in  the  nature  of  an 
expense,  should  be  posted  to  the  debit  of  the  Storeroom 
account,  which  account  has  been  previously  charged  with 
the  inventory  of  raw  material  at  the  beginning  of  the  period. 

Material  Requisition  (Form  20) 

The  material  requisitioned  out  is  credited  to  the  Raw 
Material  account  and  charged  to  the  proper  class  of  product 
in  the  Material  account  for  the  department  drawing  the 
material.  The  form  should  state  the  date,  the  department. 
and  the  order  number,  or  give  some  similar  information 
indicating  the  class  of  product,  as  well  as  the  name,  quantity 
and  cost  of  the  material  asked  for. 

Summary  of  Material  Requisitions  (Form  24) 

It  may  save  time  in  posting  if  the  requisition  sheets  are 
classified  and  summarized  on  a  summary  sheet  for  entry 


ESTIMATING    COST    SYSTEMS 


175 


to  the  journal  or  ledger  accounts.  The  form  is  generally 
analyzed  according  to  departments,  the  different  classes  of 
product  being  the  sub-heads.  Thus,  by  adding  the  totals  of 
the  first  columns  under  each  department,  the  total  material 
cost  applying  to  the  class  of  product  represented  in  that 
department  is  obtained.  The  posting  may  then  be  made  in 
totals  for  each  account  at  the  end  of  the  month  or  inventory 
period. 

Time  Report  (Form  26) 

The  time  report  must  be  designed  to  show  the  depart- 
ment, classification  number  or  other  indication  of  class  of 
product,  besides  the  name  of  the  employee,  date,  time  or 
quantity,  rate  and  amount.  Each  employee  engaged  in  direct 
production  work  in  any  way  should  make  out  such  a  time 
report  for  the  work  in  hand. 

Pay-Roil  (Form  38) 

The  pay-roll  is  used  to  summarize  and  classify  the  time 
reports  so  that  the  proper  charges  may  be  made  against  the 
various  direct  labor  and  indirect  labor  accounts.  A  separate 
sheet  should  be  prepared  for  each  operating  department, 
with  sub-heads  referring  to  the  different  classes  of  product 
operated  upon  in  that  department.  The  complete  pay-roll 
is  thus  dissected  both  by  department  and  by  class  of  product, 
and  the  charges  can  be  made  accordingly.  It  may  save  time, 
however,  if  the  pay-roll  as  analyzed  is  entered  in  the  cash 
book  and  posted  directly  to  the  debit  of  the  accounts  affected. 

Verification  Under  Third  Plan 

All  direct  charges  to  the  accounts  for  the  different  classes 
of  product  being  provided  for  as  described,  the  indirect 
expenses  still  remain  in  an  account  by  themselves.  One 
feasible  way  of  applying  them  to  the  different  classes  of 


176 


COST    ACCOUNTING 


product  is  by  making  a  distribution  on  the  basis  of  labor 
cost.  The  total  indirect  expenses  are  divided  by  the  total 
labor  cost  for  all  the  product,  and  the  rate  or  per  cent 
obtained.  The  labor  cost  charged  to  each  classification  of 
product  may  then  be  multiplied  by  this  rate  and  the  pro 
rata  share  of  the  indirect  expenses  determined.  The  amounts 
distributed  are  charged  to  the  various  products  through  the 
journal,  and  the  total  is  credited  to  the  indirect  expense 
account,  which  then  balances. 

The  totals  of  all  the  charges  then  represent  the  estimated 
inventory  value  at  the  beginning  of  the  period,  plus  the 
actual  expenditures  for  the  period.  The  accounts  are  now 
credited  with  the  goods  sold  at  the  estimated  cost  prices, 
and  classified  in  the  same  way.  This  information  is  taken, 
of  course,  from  the  analysis  of  cost  of  sales.  The  balance 
represents  the  book  inventory,  and — if  the  estimates  are 
correct — will  agree  with  the  ending  inventory  when  this  is 
taken. 

Wrong  estimates  as  to  labor  or  material  can  be  located 
according  to  department  and  class  of  product.  It  is  also 
possible  to  see,  to  a  certain  extent,  how  errors  in  calculating 
indirect  expenses  have  affected  the  costs. 

The  methods  of  discovering  sources  of  error  and  of 
revising  estimates,  and  the  verification  of  figures  in  the 
ledger,  are  the  same  as  in  the  other  plans  of  estimating  costs, 
and  need  not  be  repeated  here. 

Profit  and  Loss  Statement  (Form  68) 

The  results  of  the  third  plan  may  readily  be  exhibited 
on  a  monthly  statement  of  profit  and  loss,  which  is  prepared 
from  the  ledger  accounts  entirely  on  the  basis  of  the  esti- 
mated costs,  and  without  reference  to  the  ending  inventory. 

The  amount  and  cost  of  sales  are  entered  in  their  columns 
according  to  the  class  of  product,  and  the  difference  extended 


ESTIMATING    COST    SYSTEMS 


177 


into  the  next  column  headed  "Gross  Profit."  The  total 
selling  expenses  are  then  distributed  over  the  several  classes 
of  products  on  an  arbitrary  percentage  basis.  The  admin- 
istrative expenses  are  distributed  in  the  same  manner,  and 
the  totals  of  the  selling  and  administrative  expenses  for  each 
column  should  be  extended  to  the  "Total  Expense"  column. 

The  difference  between  the  gross  profit  and  the  total 
expenses  is  then  entered  in  the  "Net  Profit"  column  for 
each  class  of  product,  and  represents  the  estimated  net  profit 
or  loss  on  that  class  of  product.  The  total  of  the  column 
will,  of  course,  represent  the  total  estimated  net  profits  or 
losses  of  the  business. 

When  the  actual  ending  inventory  is  taken,  the  adjust- 
ments may  be  made  in  the  ledger  by  debiting  or  crediting 
the  Sales  account  in  the  same  manner  as  before  explained, 
and  the  statement  may  then  be  prepared  on  the  basis  of 
actual  costs. 


CHAPTER  XIII 

DEPARTMENTAL    SYSTEMS 

Departmental  and  Estimating  Cost  Systems 

The  departmental  cost  system  is  the  next  step  in  ad- 
vance upon  the  estimating  system  last  described.  In  both 
systems  the  class  of  product  is  the  unit  on  which  costs  are 
based,  the  difference  being  that  in  the  estimating  system  the 
costs  are  estimated  and  verified  at  the  inventory  periods, 
while  in  the  departmental  system  they  are  not  estimated, 
but  are  determined  either  at  inventory  periods  or  by  com- 
piling the  costs  monthly.  It  must  be  kept  in  mind  that  the 
word  "Department"  in  this  system  does  not  refer  to  factory 
departments,  but  to  departments  or  divisions  of  finished 
stock,  as  men's  shoes,  women's  shoes,  children's  shoes,  etc. 
To  avoid  confusion,  the  term  "Operating  Department"  will 
be  used  when  reference  is  made  to  the  divisions  in  the 
processes  of  manufacture. 

Scope  of  the  Departmental  System 

A  departmental  system  is  not  supposed  to  do  the  work 
of  a  complete  system ;  but  manufacturers  often  object  to 
the  extra  work  and  clerical  help  necessary  to  operate  a  com- 
plete system,  and  for  that  reason  provision  has  been  made 
for  the  more  elementary  methods  of  finding  costs  exempli- 
fied by  the  departmental  system.  As  a  rule  the  results  are 
satisfactory;  and  where  they  are  not,  the  elementary 
methods  of  the  system  are  sufficient  to  show  the  cause,  and 
often  indicate  along  what  lines  a  complete  system  should 
178 


DEPARTMENTAL   SYSTEMS 


179 


be  conducted.  It  is  not  to  be  expected  that  a  departmental 
system  will  perform  all  the  organization  and  efficiency 
functions  that  are  provided  for  in  complete  system  work. 

Conditions  Where  Applicable 

It  should  be  clearly  understood  that  a  system  of  this 
character  is  only  applicable  to  those  plants  where  the  pro- 
duction order  may  be  made  to  cover  a  distinct  class  of 
product  which  is  to  be  identified  with  the  selling  classification 
in  finished  product.  This  principle  must  apply  to  every 
operating  department  of  the  plant.  In  some  factories  one 
or  more  operating  departments  manufacture  product  which 
cannot  be  identified  clearly  with  the  selling  classifications 
until  it  has  reached  the  final  stages,  or  can  be  identified 
only  in  the  finishing  and  assembling  departments.  In  such 
cases  a  departmental  system  will  not  be  practical  unless  it 
is  supplemented  by  a  different  system  used  in  the  beginning 
processes  of  manufacture,  and  based  on  the  unit  of  produc- 
tion. Even  then  it  would  be  preferable  to  use  one  of  the 
complete  systems,  as  under  such  conditions  the  departmental 
plan  loses  the  simplicity  which  is  the  chief  point  in  its  favor. 

Methods  and  Principles 

The  principles  and  methods  of  the  departmental  system 
may  be  outlined  as  follows  : 

( 1 )  The  costs  are  to  be  found  on  the  different  classes 
of  product  as  units.  No  distinction  is  made  between  dif- 
ferent articles  or  kinds  of  articles  belonging  to  the  same 
class  and  only  incidental  attention  is  given  to  operating 
department  costs. 

(2)  The  unit  of  time  chosen  is  the  inventory  period. 
The  accuracy  of  the  calculated  costs  is  checked  up  and 
adjusted  by  means  of  the  beginning  and  ending  inventories. 

(3)  All  material  taken  from  the  storeroom  is  recorded 


l8o  COST   ACCOUNTING 

and  classified  according  to  its  use  in  the  various  classes  of 
product. 

(4)  The  cost  of  direct  labor  is  classified  in  the  same  way, 
and  the  distinction  between  direct  and  indirect  labor  is 
ddinitely  fixed. 

(5)  The  total  indirect  expenses  are  computed  from  the 
various  accounts,  and  are  distributed  over  the  departments  of 
product  as  units.  The  only  basis  of  distribution  provided 
for  in  the  system  is  the  direct  labor  cost.  If  any  other  basis 
is  required  to  meet  a  particular  condition,  the  system  should 
be  amplified,  and  special  arrangements  made  for  collecting 
the  necessary  data. 

(6)  The  sales  made  during  the  period  are  classified 
according  to  the  classes  of  product,  so  that  the  gross  profit 
or  loss  for  each  department  may  be  determined. 

(7)  The  selling  and  administrative  expenses  are  pro- 
rated over  the  different  departments  on  some  arbitrary  basis, 
and  the  net  profits  or  losses  for  each  determined  accordingly. 

(8)  The  proper  accounts  must  be  opened  in  the  ledger 
to  classify  and  summarize  the  data  according  to  the  fore- 
going plan  of  operation. 

Forms  Used 

Six  forms  are  ordinarily  used  in  the  departmental  system, 
viz.: 

( 1 )  Purchase  Journal 

(2)  Factory  Order 

(3)  Bill  of  Material 

(4)  Time  Report 

(5)  Analysis  of  Pay- Roll 

(6)  Register  of  Sales 

While  the  forms  described  in  this  system  are  limited  to 
the  number  specified  above,  it  does  not  mean  that  organiza- 


DEPARTMENTAL   SYSTEMS  l8i 

tion  and  efficiency  forms  described  in  other  systems  may  not 
be  used  in  a  departmental  system.  Only  the  forms  actually 
necessary  are  described  here. 

Purchase  Journal  (Form  6) 

A  simple  form  of  purchase  journal  is  used  to  good  ad- 
vantage in  a  departmental  system.  At  the  end  of  each 
month  the  party  from  whom  goods  and  supplies  are  pur- 
chased is  credited,  and  the  totals  of  the  raw  material  and 
other  classifications  named  at  the  top  of  the  purchase 
journal  columns  are  debited.  An  account  with  raw  material 
is  kept  in  the  ledger,  and  the  material  used  is  requisitioned 
out  through  a  bill  of  material,  according  to  classification  of 
product. 

All  indirect  expenses  which  are  general  in  character  are 
entered  in  the  purchase  journal  under  the  captions  "Sup- 
plies," "Repairs  and  Maintenance,"  "Insurance,  Taxes  and 
Rent,"  "Factory  Expenses,"  etc.,  but  wherever  it  is  possible 
to  charge  factory  indirect  expenses  of  any  kind  against  a 
classification  of  product,  these  items  should  be  entered  under 
"Sundry  Accounts"  according  to  the  department  affected, 
and  should  be  posted  directly  to  those  department  accounts. 

Factory  Order  (Form  13) 

The  "Factory"  or  "Production"  order  is  simple  in 
design,  and  shows  no  costs  on  its  face.  It  is  the  key,  how- 
ever, to  the  analysis  of  costs  on  the  bill  of  material  and 
time  reports.  A  single  order  may  be  issued  for  different 
articles  belonging  to  the  same  class,  but  the  same  order 
should  never  include  articles  of  different  classes.  The 
order  number  and  bill  of  material  number  specified  on  the 
order  serve  to  identify  the  class ;  and  all  costs  arising  in  con- 
nection with  a  particular  order  are  at  once  identified  by 
the  classification  number. 


1 82  COST   ACCOUNTING 

Bill  of  Material  (Form  23) 

A  bill  of  material  should  be  made  out  for  every  article 
manufactured.  A  material  requisition  will  only  be  neces- 
sary for  special  orders  outside  the  usual  routine.  The 
prices  should  be  revised  or  new  bills  made  out  whenever 
there  is  a  change  in  the  cost  of  materials  issued.  The  bill 
of  material  may  be  so  devised  that  it  will  also  serve  as  a 
receipt  for  material  actually  delivered  under  that  bill,  and 
the  summary  may  be  shown  at  the  bottom  of  the  sheet. 

The  total  amount  of  each  bill  of  material  is  credited 
to  the  Raw  Material  account,  which  has  previously  been 
charged  with  the  beginning  inventory,  and  with  all  material 
purchases  made  since. 

Time  Report  (Form  26) 

A  "Time  Report"  or  piece-work  report  that  will  apply 
to  the  conditions  should  be  used.  This  report  should  show 
the  classification  of  the  product,  the  nature  of  the  work, 
the  time  consumed,  and,  if  practicable,  the  number  of 
articles  produced.  The  rate  and  amount  columns  are  filled 
in  and  transferred  to  the  "Analysis  of  Pay-Roll,"  the 
classification  being  made  by  means  of  the  classification 
number. 

Analysis  of  Pay-Roll  (Form  35) 

The  "Analysis  of  Pay-Roll"  may  be  used  as  the  regular 
pay-roll  if  desired.  The  time  or  piece-work  reports  furnish 
the  information,  which  is  entered  for  each  day  of  the  week, 
and  totaled  for  each  pay-day.  The  distribution  is  made 
over  the  various  classifications  by  means  of  the  classification 
number. 

In  making  the  distribution  by  classes  of  product,  it 
should   be   noted   that   certain    forms   of   labor   commonly 


DEPARTMENTAL   SYSTEMS  183 

reckoned  as  indirect,  can  often  be  identified  with  certain 
classes  of  the  product.  To  ilkistrate,  a  foreman  or  inspector 
may  spend  all  his  time  in  an  operating  department  where 
there  are  only  one  or  two  classes  of  product  operated 
on.  While  his  work  cannot  be  identified  with  any  particular 
articles,  it  belongs  strictly  to  the  class  or  classes  as  a  whole ; 
and  it  would  be  a  mistake  to  put  such  labor  with  the  other 
indirect  expenses  and  distribute  it  over  all  the  departments. 
Labor  costs  that  can  be  so  identified  decrease  the  amount 
of  indirect  expenses  and  increase  the  accuracy  of  the  costs 
correspondingly. 

When  the  pay-roll  check  is  drawn,  it  should  be  charged 
in  total  to  the  Pay-Roll  account  in  the  ledger.  When  the 
amounts  distributed  on  the  analysis  of  pay-roll  are  charged 
against  the  respective  department  accounts  and  indirect 
labor,  the  Pay-Roll  account  in  the  ledger  is  credited. 

Register  of  Sales 

Where  the  sales  are  posted  direct  from  the  invoice,  a 
form  or  book  should  be  used  for  analyzing  them  into  classi- 
fications of  product. 

Another  method  is  illustrated  by  Form  64,  where  the 
sales  are  entered  on  a  register,  and  columns  are  added  for 
the  classifications ;  but  in  this  case  the  sales  classifications 
only  are  provided  for,  the  cost  of  sales  being  omitted. 

At  the  end  of  the  month,  after  all  postings  charging 
customers'  accounts  have  been  made,  the  total  of  the  sales 
is  charged  to  an  Accounts  Receivable  account;  and  the 
department  columns  are  credited  to  the  Department  Sales 
account  in  the  ledger. 

Department  Accounts 

When  the  system  is  first  put  in  operation,  department 
accounts  are  opened  in  the  ledger  according  to  the  classi- 


184  COST   ACCOUNTING 

fications  of  product.  When  the  inventory  is  taken,  it  should 
be  classified  by  departments  so  far  as  goods  in  process  and 
finished  stock  are  concerned,  and  should  be  debited  to  the 
respective  department  accounts  in  the  ledger. 

The  department  accounts  are  also  charged  with  all 
material  taken  into  process  of  manufacture,  the  information 
being  taken  from  the  bill  of  material. 

The  labor  cost  chargeable  to  each  department  is  taken 
from  the  analysis  of  pay-roll.  At  the  end  of  the  inventory- 
period  the  total  charges  of  the  indirect  expense  account  are 
distributed  over  the  various  departments  on  the  basis  of 
direct  labor  charged  to  each.  As  stated  in  the  beginning, 
other  methods  of  distribution  can  be  used  if  provision  is 
made  for  gathering  the  proper  data,  as  for  instance, 
the  number  of  hours  devoted  by  all  the  men  to  articles  in 
each  class  of  product,  which  might  be  taken  from  the  time 
reports  and  be  compiled  on  a  special  record.  When  the 
distribution  is  made,  the  indirect  expense  accounts  are 
credited  with  the  total  amount. 

At  the  end  of  the  fiscal  period  the  inventory  is  taken 
in  the  same  manner  as  the  beginning  inventory  and  credited 
to  the  department  accounts. 

The  balance  of  these  accounts  will  represent  the  cost 
of  the  goods  that  have  been  shipped;  and  this  balance 
should  be  transferred  to  the  debit  of  the  Department  Sales 
account,  this  account  then  showing  the  gross  profit  or  loss. 

The  selling  and  administrative  expenses  are  then  pro- 
rated and  charged  to  the  Department  Sales  accounts,  the 
balance  of  these  accounts  showing  the  actual  net  profit  or 
loss. 

Work  in  Process  Method 

Another  form  of  departmental  system  is  based  on  the 
keeping  of  a  "Work  in  Process"   account   in  the  ledger. 


DEPARTMENTAL   SYSTEMS  185 

Where  this  account  is  kept  the  inventory  at  the  beginning 
of  the  period  is  classified  according  to  raw  material,  work 
in  process  and  finished  stock,  and  these  three  accounts  in 
the  ledger  charged  according  to  the  inventory  classification. 
The  charges  to  the  "Work  in  Process"  account  are  taken 
from  ( I )  the  bill  of  material  for  raw  material  put  in 
process,  (2)  the  analysis  of  pay-roll  for  labor,  and  (3) 
the  total  of  the  indirect  expense  accounts. 

At  the  end  of  each  month  the  "Work  in  Process" 
account  is  credited  with  the  material,  labor  and  indirect 
expense,  from  the  "Production  Report  of  Finished  Goods," 
which  should  be  devised  to  show  material,  labor  and  indirect 
costs.  At  the  same  time  the  Finished  Stock  account  is 
charged.  The  balance  of  the  "Work  in  Process"  account 
will  then  show  the  value  of  the  work  in  process. 

As  sales  are  made  they  are  credited  to  the  Finished 
Stock  account  at  cost,  and  charged  to  the  department  sales 
accounts  in  the  ledger,  these  accounts  being  credited  with 
the  sales  according  to  the  proper  classification.  The 
balances  of  these  accounts  show  the  gross  profit  or  loss. 

When  the  actual  inventory  is  taken,  it  should  agree 
with  the  three  classifications  of  inventory  accounts  in  the 
ledger,  viz. : 

Raw  material 

Work  in  process 

Finished  stock 

If  any  discrepancies  exist  between  the  theoretical  and 
actual  inventory,  the  difference  will  have  to  be  distributed 
on  some  basis,  to  the  debit  or  the  credit  of  the  department 
accounts,  as  the  case  may  be. 

Under  this  plan  a  monthly  profit  and  loss  statement  may 
be  taken  from  the  books,  the  accuracy  of  which  will  depend 
on  the  accuracy  of  the  factory  reports. 


CHAPTER  XIV 

SPECIAL    ORDER    SYSTEM    BASED    ON    THE 
PRODUCTIVE    LABOR    METHOD 

Introduction 

In  Chapter  XII  methods  were  presented  by  which  the 
manufacturers'  estimates  of  the  various  elements  of  costs 
were  incorporated  in  the  accounting  system  for  the  purpose 
of  showing  or  proving  the  accuracy  or  inaccuracy  of  these 
estimates.  This  method,  however,  only  tests  the  correctness 
of  the  estimates  under  general  divisions,  there  being  no 
individual  proof  on  the  article  cost. 

In  Chapter  XIII  a  step  in  advance  was  shown  by  the  de- 
partmental system,  in  that  it  ascertained  the  actual  costs  by 
classes  of  product  identified  with  selling  classifications.  In 
this,  however,  as  in  the  estimating  system,  no  provision  was 
made  for  ascertaining  the  article  cost. 

This  chapter  presents  a  system  by  which  the  article  cost 
may  be  obtained  with  a  fair  degree  of  accuracy.  At  the 
same  time  it  meets  the  requirements  of  many  manufacturers 
who  wish  to  dispense  with  much  of  the  detail  in  cost  keeping. 
It  is  probably  one  of  the  simplest  cost  systems  which  can 
be  used,  and  under  suitable  conditions  will  be  found  fairly 
satisfactory.  It  is  not  as  complete  as  the  systems  which 
follow  in  respect  to  ascertaining  actual  cost;  and,  while  the 
cost  is  found  on  the  order  or  article  so  far  as  material  and 
direct  labor  is  concerned,  the  distribution  of  the  indirect  is 
made  on  a  percentage  based  on  the  entire  indirect  expenses 
i86 


SPECIAL    ORDER    SYSTEM 


187 


of  the  plant,  no  provision  being  made  for  distribution  on 
the  basis  of  departments. 

Purchase  Requisition  (Form  i) 

In  manufacturing-  industries  where  there  are  maximum 
and  minimum  hmits  to  the  amount  of  stock  to  be  carried 
irrespective  of  customers'  orders,  the  purchase  requisition 
may  be  used  by  the  stock  clerk  in  notifying  the  purchasing 
department  to  order  the  required  amount  of  goods,  unless 
the  stock  system  is  in  charge  of  the  purchasing  department, 
when  no  requisition  is  required.  When  the  purchasing  is 
guided  l^y  the  orders  received  from  customers,  the  purchase 
requisition  may  be  made  out  by  the  clerk  in  charge  of  the 
orders,  or  by  the  foreman  of  a  department,  or  by  the  super- 
intendent upon  receipt  of  the  production  order.  It  may 
cover  only  the  material  required  on  the  particular  production 
order,  or  it  may  include  estimates  of  material  required  for 
a  number  of  orders.  Usually  but  one  copy  of  the  purchase 
requisition  is  made,  and  this  is  sent  to  the  purchasing  de- 
partment, where  it  is  filed.  Conditions,  however,  may  be 
such  that  it  is  advantageous  to  give  duplicate  copies  to  the 
foreman  or  superintendent,  and  in  certain  cases  to  the  stock 
clerk  as  w'ell. 

The  requisition  usually  bears  a  number,  and  is  designed 
to  show  the  date,  the  reason  for  ordering  the  article,  the 
quantity,  description,  and  the  date  the  goods  are  wanted. 
It  is  signed  by  the  person  ordering  the  goods,  and  is  ap- 
proved by  some  one  in  authority.  The  date  of  the  order 
and  the  purchase  order  number  are  filled  in  by  the  purchasing 
department. 

Purchase  Order  (Form  2) 

The  information  appearing  on  the  purchase  order  will 
vary  with  the  different  conditions  of  selling.     The  form  is 


l88  COST   ACCOUNTING 

made  out  in  duplicate,  the  original  being  sent  to  the  person 
from  whom  the  goods  are  ordered,  while  the  duplicate 
remains  in  the  office. 

The  particular  feature  of  the  form,  as  it  relates  to  this 
system,  is  the  caption  "Charge  To."  This  will  apply  to 
three  different  classifications : 

(i)   Charges  to  the  cost  of  material  purchased 
for  a  factory  order 

(2)  Charges  to  the  cost  of  material  purchased 
for  a  customer's  order 

(3)  Charges  to  the  raw  stock  record 

In  case  goods  are  to  be  charged  under  either  of  the 
first  two  classifications,  no  material  requisition  is  required. 
In  case  they  are  ordered  for  stock,  it  should  be  so  stated 
under  the  caption  "Charge  To,"  and  a  material  requisition 
is  necessary  to  take  these  goods  out  of  stock  and  put  them 
in  process. 

When  goods  are  charged  to  either  a  customer's  order 
or  a  factory  order,  the  supposition  is  that  they  will  be  used 
when  received;  and  in  such  case  it  is  unnecessary  to  make 
any  record  on  the  raw  material  stock  record.  If,  however, 
they  go  into  stock  when  received,  they  should  be  entered 
on  the  raw  stock  record. 

Report  of  Material  Received  (Form  3) 

The  original  and  duplicate  copies  of  this  form,  after 
being  filled  out  as  to  quantity  by  the  receiving  clerk,  should 
be  sent  to  the  general  office.  The  original  goes  to  the 
purchasing  department  and  the  duplicate  to  the  clerk  in 
charge  of  the  stock  or  cost  records  for  comparison  with  the 
invoice  and  for  entry  of  the  material  on  the  raw  stock 
records  or  cost  sheet,  according  to  whether  the  material  is 


1 


SPECIAL    ORDER    SYSTEM  1 89 

taken  into  stock  or  is  immediately  used  for  some  particular 
customer's  order.  After  the  invoice  has  been  checked,  it 
is  approved  and  entered  upon  the  Purchase  Journal. 

Purchase  Journal  (Form  6) 

The  Purchase  Journal  is  a  columnar  book  which  serves : 

( 1 )  As  an  analysis  for  all  invoices 

(2)  As    a    posting    medium    to    the    creditors' 
accounts  affected 

The  invoices  are  entered  according  to  date.  Each  item 
of  the  "Total  Amount"  column  is  posted  to  the  credit  of  the 
particular  creditor's  account,  and  the  total  of  the  column 
is  credited  to  the  Accounts  Payable  account  in  the  general 
ledger,  which  represents  a  controlling  account  for  all  the 
accounts  in  the  creditors'  ledger,  show^ing  in  total  what  the 
creditors'  ledger  shows  in  detail.  The  totals  of  the  other 
columns,  with  the  exception  of  the  last  two,  are  posted  to 
the  debit  of  their  respective  accounts.  The  amounts  in  the 
last  column  are  posted  in  detail  to  the  debit  of  the  specific 
accounts  mentioned  under  the  caption  "Sundry  Accounts." 
All  the  amounts  entered  in  the  "Raw  Material"  column 
should  have  been  charged  in  the  raw  material  stock  record 
or  the  cost  sheet,  under  the  caption  "Material,"  from  the 
report  of  material  received. 

Stock  Record — Raw  Material  (Form  10) 

The  entry  in  the  raw  material  stock  record  under  the 
caption  "Ordered"  should  be  made  when  the  stock  clerk 
makes  out  the  purchase  requisition.  The  information  under 
the  caption  "Received"  should  be  taken  from  the  material 
received  sheets,  and  the  information  under  the  caption 
"Delivered"  from  the  report  of  material  delivered.     The 


190  COST   ACCOUNTING 

costing  of  the  material  is  made  from  the  report  of  material 
received. 


Production  Order  and  Cost  Sheet  (Form  15  a) 

This  form  provides  for  charging  all  costs  to  a  particular 
order  number,  shows  the  date  wanted  and  to  be  completed, 
and  is  made  out  in  duplicate.  The  original,  which  is  purely 
the  production  order,  is  sent  to  the  factory,  while  the 
duplicate  remains  in  the  office,  where  the  charges  for 
material,  labor  and  overhead  are  entered  upon  it.  The 
features  of  gathering  the  elements  of  the  cost  upon  the 
duplicate  copy  are  explained  under  the  later  discussions  of 
cost  sheet  calculations.* 

Material  Requisition  (Form  19) 

This  form  is  made  out  by  the  foreman  of  the  operating 
department  when  he  requires  material  called  for  by  a  pro- 
duction order.  The  particular  style  of  the  form  will  depend 
on  the  class  of  material  used.  Where  one  material  requisi- 
tion embraces  all  the  material  on  an  order,  it  will  not  be 
necessary  to  use  a  summary  of  material  delivered ;  but  where 
the  material  is  taken  out  on  two  or  more  requisitions,  the 
summary  of  material  delivered  should  be  used,  and  the 
"Cost"  column  of  the  material  requisition  need  not  be  filled 
out,  the  costing  in  this  case  being  done  on  the  summary  of 
material  delivered. 

Report  of  Material  Delivered  (Form  25) 

The  "Report  of  Material  Delivered"  summarizes  the 
material  cost  by  classification  of  material  and  by  order 
number.  This  is  done  for  the  purpose  of  crediting  the  raw 
stock  records  and  charging  the  cost  sheet  with  the  material 
as  it  is  used  on  orders. 

•"Production  Order  and  Cost  Sheet  (b),"  page  192. 


SPECIAL    ORDJ'R    SYSTEM 


191 


Employees'  Time  Report  (Form  30) 

The  main  point  to  bear  in  mind  when  designing  a  time 
report  is  to  harmonize  it  with  the  principles  of  cost-finding, 
as  applied  in  the  particular  system.  The  form  presented 
herewith  is  intended  to  be  used  with  a  time  stamp,  but  it 
is  not  intended  to  imply  that  a  form  of  this  character  must 
necessarily  be  used  with  the  system  of  cost-finding  under 
consideration.  In  using  the  form  illustrated,  the  time  should 
be  stamped  on  the  card,  the  order  number  entered,  and  the 
operation  upon  wliich  the  workman  is  engaged  checked, 
all  operations  being  printed  on  the  form. 

The  cost  of  all  the  productive  labor  as  shown  by  the 
employees'  time  reports  should  be  entered  on  the  production 
order  and  cost  sheets  of  each  order,  and  also  on  the  pay-roll. 

Labor  of  any  other  kind,  which  cannot  be  charged  to  a 
production  order,  forms  part  of  the  indirect  expenses  and 
should  be  entered  on  the  pay-roll  form  under  the  caption 
"Indirect."  Should  the  labor  be  in  the  nature  of  an  asset, 
such  as  labor  on  the  construction  of  a  machine  to  be  used 
for  manufacturing  purposes  in  the  plant,  the  time  should  be 
charged  to  a  special  production  order. 

Pay-Roll  (Form  39) 

When  a  pay-roll  of  the  design  shown  is  used,  the  time 
records  should  be  summarized  and  entered  on  the  pay-roll 
at  the  end  of  each  week,  the  entries  showing  the  amount 
due  to  the  workmen,  and  the  distribution  into  direct  and 
indirect.  "Supervision"  is  made  a  separate  classification 
here,  although  it  is  also  "indirect."  The  charges  in  the 
column  headed  "Supervision"  are  usually  for  services  of  the 
foreman  in  the  operating  department,  but  may  also  include 
any  other  labor  charge  of  this  character. 

When  wages  are  paid,  the  amount  of  pay-roll  is  entered 


[92 


COST   ACCOUNTING 


in  the  cash  book,  according  to  the  classification  shown  in 
the  pay-roll,  these  classifications  being  debited  in  the  ledger. 

Production  Order  and  Cost  Sheet  (Form  15  b) 

The  arrangement  of  that  portion  of  the  production  order 
used  for  collecting  the  cost  data  will  depend  entirely  on  the 
class  of  business  in  which  the  special  order  system  is  used. 
The  design  shown  here  is  made  in  duplicate,  the  original 
or  short  copy  going  to  the  factory,  and  the  duplicate 
remaining  in  the  office. 

The  information  under  the  caption  "Material"  will  come 
from  the  report  of  material  received,  the  material  requisition, 
or  the  report  of  material  delivered.  This  will  give  the 
material  cost  of  the  order.  The  labor  cost  is  obtained  from 
the  time  reports,  and  may  be  posted  directly  from  these 
records,  according  to  operation,  or  may  be  summarized  on 
a  pay-roll  analysis  and  posted  in  total. 

The  "Indirect"  will  be  ascertained  by  adding  to  the  labor 
cost  a  fixed  percentage  to  cover  indirect  expenses.  The 
percentage  used  in  this  system  is  predetermined,  based 
upon  the  results  of  past  periods,  and  may  be  changed  at 
inventory  periods,  or  as  conditions  warrant. 

Stock  Record — Finished  Product  (Form  56) 

When  all  orders  are  shipped  immediately  upon  com- 
pletion, it  is  unnecessary  to  keep  a  finished  stock  record; 
but  where  a  stock  of  the  finished  product  is  carried  on  hand 
the  entries  under  "Production"  should  be  made  from  the 
production  order  and  cost  sheet,  and  under  "Sold"  from  the 
sales  record. 

It  frequently  occurs  in  a  special  order  business  that  parts 
which  are  common  to  certain  styles  of  product  are  manu- 
factured and  kept  in  stock,  so  as  to  facilitate  shipments 
when  orders  are  received.     In  all  such  cases  the  regiilar 


SPECIAL    ORDER    SYSTEM 


^93 


production  order  and  cost  sheet  should  be  used,  and  the 
regular  course  pursued. 

Bill  and  Shipping  Order  (Form  62) 

The  billing  system  provides  for  three  copies  of  the  bill 
and  shipping  order,  which  are  used  as  follows  : 


customer. 

Duplicate — Serves  as  a  shipping  order. 

Triplicate — Serves  as  a  sales  record,  being  used 
for  posting  to  the  customer's  account.  It  also  pro- 
vides columns  for  calculating  the  cost  of  the  sale. 

Credit  Certificate  (Form  63) 

This  form  is  used  for  returns  of  goods  sold,  the  selling 
price  being  taken  from  the  sales  record  or  the  sales  sheet, 
and  the  cost  price  from  the  "Production  Order  and  Cost 
Sheet."  The  original  is  sent  to  the  customer,  and  the 
duplicate  remains  in  the  office  to  act  as  a  posting  medium  to 
the  accounts.  A  material  received  sheet  should  be  made 
out  in  all  cases  where  merchandise  is  returned,  showing  the 
actual  receipt  of  all  such  goods  and  thereby  serving  as  a 
voucher  for  the  credit  certificate.  The  merchandise  re- 
turned should  be  entered  on  the  finished  stock  records.  In 
case  returned  goods  are  defective,  they  may  be  entered  on 
the  part-finished  stock  record  until  the  defects  are  corrected 
or  until  the  goods  are  disposed  of  as  seconds  or  scrap.  The 
loss  in  value  or  the  cost  of  repairs  will  be  charged  against 
the  department  or  account  affected. 

Register  of  Sales  and  Costs  (Form  64) 

This  form  provides  for  registering  the  sales  and  dis- 
sales    price    and    cost    according    to    sales 


194 


COST   ACCOUNTING 


classifications.  Goods  returned  as  shown  by  the  credit 
certificates  should  also  be  entered  on  a  separate  sheet  of  the 
register  of  sales  and  costs  and,  at  the  end  of  the  month, 
deducted  from  the  totals  according  to  their  respective  classi- 
fications. 

The  total  of  the  "Accounts  Receivable"  column  should 
be  charged  to  that  account  in  the  general  ledger,  and  the 
total  of  the  sales  columns  "A,"  "B,"  and  "C"  should  be 
credited  to  these  accounts  in  the  ledger. 

The  total  of  the  "Cost  of  Sales"  column  should  be 
credited  to  the  finished  stock  account,  and  the  totals  of  the 
cost  of  sales  columns  "A,"  "B,"  and  "C  should  be  charged 
to  the  sales  accounts  in  the  ledger. 

Inventory  Test  (Form  60) 

The  purpose  of  the  "Inventory  Test"  is  explained  in 
Chapter  VII,  but  a  brief  reference  to  it  is  necessary  here,  as 
no  system  should  be  operated  w^ithout  a  form  of  this 
character.  Should  the  inventory  test  reveal  missing  stock 
which  cannot  be  accounted  for,  an  entry  should  be  made 
crediting  the  stock  records,  and  charging  an  account — 
which  might  be  called  "Over,  Short,  and  Damaged  Ac- 
count"— in  the  ledger.  Should  the  stock  records  show  less 
stock  on  hand  than  is  actually  found,  then  the  entry  would 
be  a  debit  to  the  stock  records,  and  a  credit  to  the  Over, 
Short,  and  Damaged  account.  The  balance  of  this  account 
forms  part  of  the  general  operating  expenses. 

Explanation  of  Chart  and  Summary  of  Entries 

Subsidiary  Forms  and  Records 

The  books  and  forms  used  to  authorize  and  record  the 
purchase  of  materials  and  supplies,  and  other  expenditures 
as  these  are  made,  are  four  in  number : 


SPECIAL    ORDER    SYSTEM  igj 

(i)  The  "Purchase  Requisition,"  which  shows 
the  materials  and  supphes  required,  and  is  followed  by 

(2)  The  "Purchase  Order,"  which  is  sent  to  the 
creditor,  ordering  the  necessary  materials  or  supplies. 

(3)  The  "Invoice,"  which  is  checked  when 
received  with  the  purchase  order,  and  also  with  the 
report  of  material  received,  and  is  then  entered 
upon 

(4)  The  "Purchase  Journal,"  which  classifies  the 
expenditures,  for  posting  to  the  controlling  accounts 
affected. 

The  forms  required  in  recording,  receiving,  storing  and 
requisitioning  raw  material  are  as  follows : 

(i)  "Report  of  Material  Received,"  which — 
after  being  verified  with  the  purchase  order — is 
entered  on 

(2)  The  "Raw  Stock  Record" — unless  the 
material  is  entered  directly  upon  the  cost  sheet  of  a 
particular  order. 

(3)  The  "Material  Requisition,"  which  shows 
the  raw  materials  required  for  a  certain  order,  and 

may  be  entered  directly  upon  the  cost  sheet  of  a 
particular  order,  when  same  is  credited  to  the  raw 
stock  record,  or  may  be  recapitulated  upon  the 
report  of  material  delivered. 

The  report  of  material  delivered  shows  the  raw  material 
put  into  operation,  which  is  credited  on  the  raw  stock 
records,  and  charged  to  the  cost  sheets  of  the  various  orders 
affected. 

The  forms  necessary  for  the  compilation  of  the  cost  data 
are  as  follows : 


196 


COST    ACCOUNTING 


( 1 )  The  "Cost  Sheet,"  which  is  charged  with  the 
material  put  into  operation  from  the  "Report  of 
Material  Delivered,"  as  above  described,  with  the 
labor  cost  from 

(2)  The  "Time  Reports,"  and  with  the  indirect 
expenses  which  are  obtained  from  a  previously 
prepared 

(3)  "Schedule  Showing  the  Fixed  Percentage" 
to  be  added  to  the  labor  cost. 

The  time  reports  are  summarized  upon  the  pay-roll  for 
pay-roll  purposes. 

When  orders  are  completed  they  are  either  transferred 
to  the  "Finished  Stock  Record,"  or  shipped  and  billed 
directly.  In  case  the  finished  orders  are  put  into  stock,  entry 
is  made  upon  the  finished  stock  record.  When  the  orders 
are  shipped  and  the  bill  is  prepared,  entry  is  made  in  the 
"Register  of  Sales  and  Costs."  In  case  the  credit  certificate 
shows  merchandise  returned,  entry  should  be  made  upon 
the  finished  stock  record,  and  also  upon  the  register  of  sales 
and  costs. 

Method  of  Control 

The  controlling  accounts  in  this  system  are  all  kept  in 
the  general  ledger,  and  are  as  follows  : 

( 1 )  Raw  Material 

(2)  Direct  Labor 

(3)  Accounts  with  the  items  composing  the 
indirect  expenses 

(4)  Overhead 

(5)  Work  in  Process 

(6)  Finished  Stock 

(7)  Accounts  with  the  various  sales  classifications 


;PECIAL    ORDER    SYSTEM 


197 


(i)  The  Raw  Material  account  represents  in  total 
what  is  shown  by  the  raw  stock  records  in  detail.  It  is 
debited  with  the  total  purchases  of  raw  material,  as  shown 
by  the  purchase  journal,  and  is  credited  with  any  allowances, 
and  with  the  total  raw  material  which  has  been  requisitioned 
out.  as  shown  by  the  report  of  material  delivered,  the 
balance  representing  the  inventory  of  raw  material  and 
agreeing  with  the  detailed  raw  stock  records. 

(2)  The  Direct  Labor  account  is  debited  from  the  cash 
book  with  the  total  amount  paid  for  productive  labor,  and 
is  credited  from  the  summary  of  the  time  reports  with  the 
total  amount  distributed  and  charged  to  the  "Production 
Order  and  Cost  Sheets." 

(3)  The  accounts  representing  the  items  composing  the 
indirect  are  debited,  either  from  the  purchase  journal  or 
cash  book,  with  the  amount  incurred  for  each  classification, 
and  are  credited  each  month  with  the  balance  of  the  account, 
unless  part  of  same  is  to  be  treated  as  a  deferred  charge. 

(4)  The  Overhead  account  is  charged  each  month, 
through  a  journal  entry,  with  the  items  composing  the  in- 
direct expenses,  and  is  credited  from  the  schedule  showing 
the  fixed  overhead  percentage  with  the  total  amount  applied 
to  the  various  production  orders  and  cost  sheets.  The 
balance,  if  a  debit,  shows  the  undistributed  portion  of  the 
overhead,  which  means  that  the  fixed  percentage  added  to 
the  labor  cost  was  not  sufficient  to  cover  the  indirect  ex- 
penses. When  there  is  a  credit  balance,  however,  it  shows 
that  the  percentage  allowed  was  more  than  sufficient.  In 
either  event,  the  percentage  to  be  used  for  the  next  period 
should  be  adjusted  in  accordance  with  the  information  thus 
disclosed. 

(5)  The  Work  in  Process  account  is  debited  with  the 
total  amounts  that  have  been  credited  to  the  raw  material, 
direct  labor  and  overhead  accounts,  and  is  credited  from  the 


198  COST    ACCOUNTING 

summary  of  finished  orders  with  the  total  cost  of  the  orders 
that  have  been  completed,  when  these  are  either  transferred 
to  finished  stock  or  shipped.  The  balance  represents  the 
total  amount  of  work  in  process,  and  should  agree  with  the 
total  production  orders  and  cost  sheets  not  completed. 

(6)  Finished  Stock  account  is  debited  from  the  summary 
of  finished  orders  with  the  total  cost  of  completed  orders, 
and  is  credited  from  the  register  of  sales  and  costs  with 
the  total  cost  of  the  sales,  the  balance  being  the  inventory  of 
finished  stock.  It  represents  in  total  what  is  shown  in  detail 
by  the  finished  stock  records. 

(7)  Sales  accounts  should  be  kept  with  each  classifica- 
tion of  the  product,  and  should  be  debited  with  the  total 
cost  of  the  sales  when  same  is  credited  to  the  Finished  Stock 
account.  The  accounts  are  credited  with  the  total  selling 
price  of  the  sales  when  same  is  debited  to  the  Accounts 
Receivable  account.  The  balance,  if  a  debit,  represents  the 
gross  loss,  and,  if  a  credit,  the  gross  profit. 

Profit  and  Loss  Statement  (Form  68) 

The  "Profit  and  Loss  Statement"  is  prepared  from  the 
ledger  accounts.  The  departments  represent  the  classifica- 
tions of  the  product  according  to  selling  departments.  The 
information  for  the  first  three  columns  is  obtained  from  the 
sales  account  of  each  selling  department.  The  selling  and 
administrative  expenses  may  be  distributed  over  the  various 
departments  on  some  arbitrary  basis,  according  to  the 
amount  of  sales,  cost  of  sales,  or  gross  profit  that  each  de- 
partment bears  to  the  total  of  all  departments.  If,  however, 
some  of  the  items  composing  the  selling  and  administrative 
expenses  can  be  localized  and  charged  to  a  specific  depart- 
ment, this  should  be  done.  In  such  case  the  results  will  be 
more  accurate,  because  the  total  to  be  distributed  arbitrarily 
has  been  lessened. 


A 


-ECTING  GENERAL 
GENERAL 


faw 

Material  Account 

eel  Enpanse  Accou 

C- 

Accounts  PayabI 

dir 

eel  Lahor  Accoun 

Cr 

Cash  Account 

Raw  Malenal/g^i,  |„  process  Account 

Cr.   Raw   Material  Account 


/Ofk  In  Pro 
Cr.  Direct 
Cr.  Ovejhe 


lishea  Stock  Account 

'•r.  Work  in  Process  Accoun 


Shipment     or  _  „       ,     . 

ct„.i,     .nfl     P„i  Cr.  Finished  Stock  Ac^count 
"°!r»r.';    Cr.   work   in    Proces.  Accoun 


red  from  accoun 


SPECIAL    ORDER    SYSTEM 


199 


Balance  Sheet  (Form  69) 

The  balance  sheet  is  also  prepared  from  the  accounts  in 
the  general  ledger.  In  addition  to  showing  the  hnancial 
condition  at  the  end  of  the  month,  it  shows  the  increases  or 
decreases  of  each  item  as  compared  with  the  previous  period. 


I 


SPECIAL    ORDER    SYSTEM 


199 


Balance  Sheet  (Form  69) 

The  balance  sheet  is  also  prepared  from  the  accounts  in 
the  general  ledger.  In  addition  to  showing  the  financial 
condition  at  the  end  of  the  month,  it  shows  the  increases  or 
decreases  of  each  item  as  compared  with  the  previous  period. 


CHAPTER  XV 

SPECIAL    ORDER    SYSTEM    BASED    ON    THE 
PROCESS    OR    MACHINE   METHOD 

The  system  outlined  in  this  chapter  provides  for  finding 
costs  under  the  machine  or  process  method,  and  differs  from 
the  system  described  in  the  preceding  chapter  more  par- 
ticularly in  the  method  used  for  the  distribution  of  indirect 
or  overhead  charges  by  operating  departments  or  manu- 
facturing centers.  It  is  applicable  where  the  production 
order  represents  the  customer's  order,  although  it  may  be 
used  to  advantage  where  the  production  order  represents 
a  definite  production  by  classification  of  product  from  which 
customers'  orders  are  filled.  As  the  conditions  in  every 
plant — even  those  in  the  same  line  of  business — are  different 
in  some  respects,  the  forms  submitted  here  are  only  for 
illustrative  purposes,  and  to  suggest  the  general  nature  of 
the  designs  to  be  used.  It  will  be  noted  that  certain  forms 
are  used  of  exactly  the  same  kind  as  in  the  previous  system. 

Purchase  Requisition  (Form  i) 

The  explanation  in  Chapter  XIV  covers  the  salient  points 
in  connection  with  this  form.  As  the  present  system  is 
adapted  to  plants  of  larger  size  than  the  system  described  in 
Chapter  XIV,  the  purchase  requisition  would  usually  be 
made  out  by  the  stock  clerk,  all  material  purchases  going 
into  the  storeroom. 


SPECIAL    ORDER    SYSTEM— PROCESS    METHOD     201 

Purchase  Order  (Form  2) 

In  illustrating  this  design,  which  is  the  same  as  the 
purchase  order  of  Chapter  XIV,  particular  attention  is  called 
to  the  caption  "Charge  To,"  under  which  the  entries  should 
indicate  whether  the  charge  is  to  be  made  against  the 
production  order  or  the  storeroom. 

Report  of  Material  Received  (Form  3) 

The  explanation  of  this  form  will  be  found  in  Chapter 
XIV.* 

Accounts  Payable  Voucher  (Form  7) 

The  accounts  payable  voucher  provides  for  recording 
and  analyzing  the  expenditures,  and  arranging  them  in 
such  a  manner  as  to  facilitate  entry  on  the  register  of  ac- 
counts payable.  The  expenditures  are  classified  into  two 
main  divisions : 

( 1 )  Those  affecting  factory  records 

(2)  Those  affecting  general  ledger  accounts 

The  entries  affecting  factory  records  consist  of  material, 
labor  and  indirect  expenses ;  while  the  general  ledger  entries 
consist  of  administrative  expenses,  selling  expenses,  and  all 
charges  to  capital  accounts,  such  as  real  estate,  plant, 
equipment,  etc. 

When  the  accounts  payable  voucher  calls  for  materials 
or  supplies  purchased,  the  purchase  requisition,  purchase 
order  and  material  received  sheet  should  be  attached ;  and 
if  it  shows  the  expenditure  for  labor  as  well,  the  pay-roll 
analysis  should  also  be  attached. 


•See  page  ij 


202  COST    ACCOUNTING 

Register  of  Accounts  Payable  (Form  g) 

The  accounts  payable  vouchers  are  entered  in  the  register 
of  accounts  payable  according  to  date  and  voucher  number. 
In  addition  to  showing  name  of  creditor  and  amount  payable, 
the  form  provides  space  for  entering  payment  of  the  voucher 
and  for  indicating  the  charges  to  the  operating  and  property 
accounts. 

The  entries  for  the  accounts  in  the  general  ledger  are  as 
follows : 

The  total  of  the  "xA.ccounts  Payable"  column  is  credited 
to  the  Accounts  Payable  account.  The  totals  of  the 
"Factory,"  "Selling  Expenses,"  "Administrative  Expenses," 
"Machinery  and  Tools,"  "Real  Estate  and  Buildings,"  and 
"Furniture  and  Fixtures"  columns  are  debited  to  their  re- 
spective accounts.  The  details  in  the  "Miscellaneous 
Accounts"  column  are  posted  individually  to  the  debit  of  the 
proper  accounts. 

Stock  Record — Raw  Material  (Form  lo) 

In  this  system,  all  raw  material  stock  is  supposed  to  be 
ordered  by  the  stock  clerk,  who  fills  in  the  quantity  under 
the  proper  caption  at  the  time  he  makes  out  the  purchase 
requisition.  The  information  as  to  the  quantities  received 
and  delivered  is  obtained  from  the  report  of  material  re- 
ceived and  report  of  material  delivered,  the  costing  being 
obtained  from  the  latter. 

Production  Order  and  Cost  Sheet  (Form  i6) 

It  will  be  noted  that  in  both  the  special  order  systems, 
the  production  order  and  cost  compilation  are  combined. 
The  two  purposes — that  is.  the  authorization  for  the  manu- 
facture of  goods  and  the  compilation  of  the  costs — may  as 
well  be  separated,  and  this  has  been  done  in  the  product 


SPECIAL    ORDER    SYSTEM— PROCESS    METHOD 


>03 


systems  described  elsewhere.*  In  the  present  system  the 
first  copy  of  Form  16  is  used  as  a  production  order  only, 
while  the  duplicate  is  used  as  a  cost  sheet.  The  purpose  of 
using  different  designs  in  the  different  systems,  as  already 
explained,  is  to  illustrate  the  different  methods  of  gathering 
the  cost  data. 

If  sub-production  orders  are  issued  to  the  various  de- 
partments, it  will  be  necessary  to  use  the  original  only,  not 
the  duplicate.  The  use  of  the  duplicate  copy  is  explained 
in  its  proper  order  in  this  system. f 

Material  Requisition  (Form  19) 

The  general  explanation  of  this  form  is  given  in 
Chapter  XIV,  but  where  the  requisition  is  to  be  used  for  the 
supplies  chargeable  to  a  machine  or  process,  the  machine  or 
process,  according  to  the  department,  should  be  indicated 
under  the  caption  "Charged"  in  place  of  "Order  Number." 

Report  of  Material  Delivered  (Form  25) 

The  "Report  of  Material  Delivered"  is  used  in  this 
system  to  summarize  the  material  requisitions  according  to 
department  and  order  number.  In  case  of  supplies  charge- 
able to  a  machine  or  process,  the  order  number  should  be 
omitted,  and  the  machine  or  process  inserted.  The  costs  of 
material  delivered  are  entered  on  this  form,  and  not  on  the 
requisition.  The  raw  stock  records  are  also  credited  from 
the  "Report  of  Material  Delivered."  If  the  material  is  to 
be  used  for  maintenance,  an  entry  is  made  on  the  process 
card  record,  and  if  for  repairs  and  supplies,  on  the  "Power 
Cost  and  Distribution  Record."  The  material  cost  is 
entered  on  the  duplicate  copy  of  the  "Production  Order  and 
Cost  Record,"  according  to  order  number. 

♦Chapters  XVI,  XVII. 
tPage  2o8. 


204 


COST    ACCOUNTING 


Employees'  Time  Report  (Form  30) 

The  time  reports  should  be  summarized  for  entry  on 
the  pay-roll  in  the  same  manner  as  in  the  previous  system. 
All  the  direct  labor  is  also  entered  upon  the  process  card 
record,  classified  according  to  department,  machine  number, 
and  operation.  The  direct  labor  time,  classified  by  opera- 
tions, is  also  entered  upon  the  "Production  Order  and  Cost 
Sheet"  of  the  respective  orders.  It  will  be  seen,  therefore, 
that  the  direct  labor  time  as  entered  upon  the  process  card 
records  should  agree  with  the  productive  labor  time  entered 
upon  the  production  order  and  cost  sheet.  The  wages  of 
the  engineers  and  firemen  should  be  entered  upon  the  power 
costs  and  distribution  record. 

Pay-Roll  (Form  39) 

This  design  is  the  same  as  that  used  in  Chapter  XIV,  but 
is  used  in  the  present  system  for  pay-roll  purposes  only. 
Except  for  this  difference,  the  explanation  of  the  form  given 
in  Chapter  XIV  will  apply  here. 

Analysis  of  Factory  Expenditures  (Form  41) 

The  "Analysis  of  Factory  Expenditures"  is  used  for 
analyzing  the  indirect  expenses.  The  information  is  ob- 
tained from  the  accounts  payable  vouchers.  The  columns 
may  be  headed  with  the  names  of  the  items  composing  the 
indirect  expenses;  and  at  the  end  of  a  year  a  summary 
sheet  may  be  prepared  with  the  names  of  these  items 
entered  at  the  left  of  the  form,  and  the  months  of  the  year 
running  across  the  top  of  the  form.  This  summary  sheet 
should  prove  valuable  as  a  comparative  statement,  showing 
the  variations  in  the  indirect  expenses  each  month. 

That  portion  of  the  indirect  expenses  chargeable 
directly  to  a  particular  department  should  be  entered  on  the 


;PECIAL    ORDER    SYSTEM— PROCESS    METHOD 


205 


process  card  record  of  that  department.  The  items  of  the 
indirect  that  are  chargeable  to  the  power  costs  should  in  a 
like  manner  be  entered  upon  the  "Power  Costs  and  Dis- 
tribution Record."  The  remaining  items  of  indirect  expense 
are  distributed  on  the  basis  of  productive  labor. 

Process  Card  Record  (Form  45) 

Wherever  a  process  cost  system  can  be  used,  it  will  give 
more  accurate  results  than  any  other  method  employed  in 
cost  finding.  It  is  by  the  process  card  record  and  power 
cost  and  distribution  record  that  the  principles  of  the  system 
are  illustrated.  The  process  card  record  will,  of  course, 
permit  of  changes  according  to  conditions  in  manufacture, 
not  only  as  to  arrangement  of  columns  for  the  analysis  of 
costs,  but  also  as  to  arrangement  of  the  information.  The 
results  to  be  obtained,  however,  are  the  operating  hours, 
and  the  various  machine  or  process  costs. 

To  illustrate  :  The  form  shown  provides  for  the  distribu- 
tion of  time  and  cost  on  the  side  of  the  form,  and  the 
operations  at  the  top  of  the  various  columns.  By  leaving 
the  columns  last  mentioned  blank,  and  using  a  separate  card 
for  each  operation  or  machine,  the  columns  may  be  headed 
according  to  days,  weeks  or  months,  without  changing  in 
any  way  the  ruling  shown,  and  without  affecting  the  results 
to  be  accomplished.  On  the  other  hand,  the  form  may  be 
re-designed,  the  distribution  of  the  time  and  cost  be  entered 
at  the  top  of  the  columns,  the  operations  entered  on  the 
side,  and  the  form  used  as  a  daily,  weekly  or  monthly  record 
for  all  operations  in  the  plant.  Where  this  is  done,  and 
the  form  used  for  recording  daily  transactions,  naturally  a 
new  sheet  or  card  must  be  used  each  day,  and  summarized 
by  the  week  or  month. 

The  entry  from  the  time  records  on  this  card  will  show 
the  machine  hours  of  operation  and  the  idle  machine  time. 


2o6  COST    ACCOUNTING 

Under  the  captions  "Day  Work"  and  "Piece  Work"  will 
be  entered  the  labor  cost  for  each  day.  Under  the  caption 
"Supplies"  will  be  entered  the  cost  of  supplies,  as  shown 
by  the  report  of  material  delivered,  and  under  the  caption 
"Power"  will  be  shown  the  power  cost  as  taken  from  the 
"Record  of  Power  Costs  and  Distribution." 

The  next  item,  "Floor  Space,"  is  the  rent,  or  other 
charges  which  take  the  place  of  rent  if  the  building  is 
owned.  These  are  obtained  from  the  analysis  of  factory 
expenditures.  The  total  floor  space  of  the  plant  is  to  be 
ascertained  by  departments,  and  this  total  divided  into  the 
total  cost  of  the  floor  space  will  give  the  cost  per  square 
foot.  The  space  occupied  by  each  machine  or  process 
should  be  calculated  in  square  feet,  and  this  number  multi- 
plied by  the  cost  per  square  foot,  will  give  the  amount  to  be 
charged  for  floor  space.  A  permanent  schedule  should  be  on 
hand  stating  the  various  divisions  of  floor  space. 

Where  the  property  and  plant  are  owned  by  an  individual 
or  company,  the  amount  of  rental  will  be  ascertained  by 
taking  into  consideration,  interest,  taxes,  maintenance, 
insurance,  and  any  other  items  relating  to  the  cost  of  the 
ground  or  building.  Under  the  caption  "Maintenance"  the 
cost  is  obtained  from  the  time  reports  and  from  material 
requisitions  or  reports  of  material  delivered.  "Deprecia- 
tion" should  come  from  a  permanent  schedule,  to  be  made  up 
so  that  a  fixed  charge,  based  on  the  machine  charge  for 
actual  working  hours,  may  be  made  against  each  month's 
operation,  and  divided  among  the  machines  or  processes. 

The  "Insurance"  item  is  taken  from  a  schedule  compiled 
from  the  total  amount  of  insurance  paid,  that  part  of 
the  insurance  applying  to  the  machinery  being  divided 
departmentally  among  the  various  operating  departments. 

The  information  under  the  caption  "Department  In- 
direct" is  obtained  from  the  analysis  of  factory  expenditures, 


SPECIAL    ORDER    SYSTEM— PROCESS    METHOD 


207 


which  shows  the  indirect  expenses  chargeable  to  different 
operating  departments  which  are  not  already  classified  on 
the  process  cost  card. 

The  last  item,  "Indirect  Expenses,"  can  be  obtained  from 
the  analysis  of  factory  expenditures  by  taking  the  balance 
of  the  indirect  expenses  for  the  cost  period,  and  dividing 
this  amount  by  the  machine  hours.  The  rate  per  hour  thus 
ascertained,  multiplied  by  the  hours  charged  to  each 
machine  or  operation,  will  give  the  amount  chargeable  to 
this  machine  or  operation. 

It  will  now^  be  seen  that  all  the  costs  relating  to  manu- 
facturing, except  material,  have  been  charged  against 
machines  or  operations.  The  total  operating  cost  per  hour 
will  now  be  calculated  for  each  machine  or  operation.  The 
rate  obtained  is  then  applied  to  the  various  orders  passing 
through  any  or  all  of  the  machines  or  operations,  according 
to  the  time  consumed,  by  multiplying  the  number  of  hours 
by  the  rate  per  hour,  the  result  being  the  process  or  machine 
costs.  The  information  contained  on  the  process  card 
record  is  transferred  to  the  production  order  and  cost 
record. 

Power  Cost  and  Distribution  (Form  46) 

This  record,  as  to  labor  costs,  is  made  up  from  the  time 
reports.  The  rental,  depreciation,  and  insurance  items  are 
entered  from  the  prepared  schedules  already  referred  to. 
The  record  of  repair  costs  will  come  from  the  time  reports, 
and  also  from  the  material  requisitions  or  reports  of 
material  delivered.  Oil,  waste,  etc.,  will  also  come  from  the 
material  requisitions  or  reports  of  material  delivered. 

The  total  of  this  power  cost  is  divided  by  the  total 
horse-power  hours  of  all  machines  as  actually  operated,  to 
obtain  the  rate  per  horse-power  hour.  This  unit  rate  or 
horse-power  cost  per  hour  is  multiplied  by  the  total  number 


2o8  COST    ACCOUNTING 

of  operating  hours  of  each  machine,  and  the  amount  extended 
in  the  column  headed  "Power  Costs."  The  total  of  this 
column  should  equal  the  total  shown  in  the  column  headed 
"Costs"  in  the  analysis  of  power  cost. 

Production  Order  and  Cost  Sheet  (Form  i6) 

The  original  of  this  form  has  been  referred  to  pre- 
viously as  a  production  order.  The  explanation  which 
follows  applies  only  to  the  duplicate  copy.  The  information 
under  the  caption  "Operations"  is  taken  from  the  time  re- 
ports of  the  employees,  chargeable  to  the  order.  The 
entries  are  for  time  only,  and  a  summary  of  the  time 
records  for  this  purpose  should  be  made. 

It  does  not  make  any  difference  how  many  employees 
are  engaged  on  one  operation,  or  what  their  rate  may  be,  as 
the  total  number  of  hours  for  each  operation  or  machine 
is  all  that  is  entered  on  this  record  from  the  time  reports. 
At  the  end  of  the  month  the  total  time  in  each  operating 
column  is  shown,  and  the  process  or  machine  rate  entered, 
this  latter  information  being  obtained  from  the  process  card 
record. 

The  total  number  of  hours,  multiplied  by  the  rate  per 
hour  of  each  operation,  will  give  the  process  or  machine 
costs  chargeable  to  the  order,  according  to  operation  or 
machine.  The  total  of  the  various  operations  will  give  the 
total  cost  chargeable  to  the  order,  including  indirect  or 
overhead  expenses. 

The  information  under  "Material  Used"  will  be  taken 
from  the  report  of  material  delivered,  and  the  total  entered 
after  the  word  "Material"  under  the  caption  "Summary." 
The  total  cost  of  the  order  is  obtained  by  adding  the  process 
cost  to  the  material  cost. 

Below  the  total  cost  may  be  entered  the  quantity  of  the 
order,  the  price  per  pi.ece,  where  it  is  applicable,  the  selling 


SPECIAL    ORDER    SYSTEM— PROCESS    METHOD 


J  09 


price  and  gross  profit.  The  cost  of  the  order  is  entered 
under  the  proper  classification  in  the  finished  stock  records, 
and  the  information  under  "Selhng  Price"  should  be  used 
in  billing  the  order  for  shipment.  The  cost  and  selling 
price  may  also  be  used  in  the  analysis  of  cost  of  sales. 

Other  Forms  Used 

Stock  Record,  Finished  Product  (Form  56 

Bill  and  Shipping  Order  (Form  62) 

Credit  Certificate  (Form  63) 

Register  of  Sales  and  Costs  (Form  64) 

Inventory  Test  (Form  60) 

Statement  of  Profit  and  Loss  (Form  68) 

Balance  Sheet  (Form  69) 

The  general  explanation  of  these  forms  m  Chapter  XIV 
is  sufficient  to  show  their  use  in  the  present  system. 

Explanation  of  Chart  and  Summary  of  Entries 

Subsidiary  Forms  and  Records 

The  forms  necessary  to  record  the  authorization  and 
purchase  of  materials  and  supplies,  and  to  record  the  other 
expenditures  incurred,  are  as  follows : 

(i)    Purchase  Requisition 

(2)  Purchase  Order 

(3)  Invoice 

All  these  are  used  in  the  same  manner  as  described  in 
the  previous  system. 

The  accounts  payable  voucher  is  used  for  the  purpose 
of  classifying  the  expenditures  preparatory  to  their  entry 
on    the    register    of    accounts    payable.      The    information 


2IO  COST    ACCOUNTING 

necessary  to  classify  the  expenditures  on  the  accounts  pay- 
able voucher  is  obtained  from  the  invoice  in  the  case  of 
materials  and  supplies  or  indirect  expenses,  and  from  the 
pay-roll  in  the  case  of  direct  and  indirect  labor. 

The  forms  used  in  receiving,  storing,  and  requisitioning 
raw  material  and  supplies  are  used  in  the  same  manner  as 
in  the  previous  system. 

The  report  of  material  delivered  is  used  to  show  the 
raw  material  and  supplies  put  into  operation;  and  the  in- 
formation relating  to  raw  material  is  transferred  to  the 
"Production  Order  and  Cost  Sheet,"  while  the  information 
relating  to  the  supplies  is  transferred  to  either  the  process 
card  records  or  the  power  cost  and  distribution  records. 

The  compilation  of  the  cost  data  is  made  upon  the  pro- 
duction order  and  cost  sheet.  The  information  for  the 
material  charged  is  obtained  from  the  report  of  material 
delivered.  The  information  for  the  labor  and  indirect 
expense  charges  is  obtained  from  the  process  card  record, 
together  with  the  time  reports,  which  show  the  productive 
labor  time  upon  each  particular  order. 

The  productive  labor  cost  is  transferred  to  the  process 
card  records  or  the  power  cost  and  distribution  records  from 
the  time  reports,  which  are  summarized  upon  the  pay-roll 
for  pay-roll  purposes  and  entered  upon  the  accounts  payable 
voucher. 

The  information  for  the  analysis  of  factory  expenditures 
is  obtained  from  the  accounts  payable  voucher,  and  is  trans- 
ferred to  either  the  power  cost  and  distribution  records  or 
the  process  card  records.  Afterwards  all  information  on 
the  power  cost  and  distribution  records  is  transferred  to 
the  process  card  records. 

The  cost  of  the  finished  stock  orders  or  finished  parts 
is  transferred  to  the  respective  stock  records ;  and  in  case 
any  finished  parts  are  put  back  into  operation  for  completion, 


SPECIAL    ORDER    SYS  TEM— PROCESS    METHOD     211 

the  cost  of  such  parts  is  transferred  to  the  cost  sheet.  When 
finished  parts  or  finished  stock  are  shipped,  the  stock  records 
are  credited,  and  an  entry  is  made  upon  the  register  of  sales 
and  costs  from  the  duplicate  of  the  hill  and  shipping  order. 
When  merchandise  is  returned  by  a  customer,  a  report 
of  material  received  is  made  out,  which  supplies  the  data 
for  (i)  the  credit  certificate,  (2)  transferring  such  mer- 
chandise back  into  either  part-finished  or  finished  stock,  and 
(3)  making  the  proper  entrv  uDon  the  register  of  sales  and 
costs. 

Method  of  Control 

The  cost  records  in  this  system  are  controlled  by  means 
of  a  "Factory"  account,  which  is  kept  in  the  general 
ledger.  This  account  is  debited  with  all  the  factory  charges 
of  material,  labor  and  indirect  expenses  when  the  Accounts 
Payable  account  is  credited.  The  Factory  account  is  credited 
W'ith  the  cost  of  the  sales  when  these  are  charged  to  the 
various  sales  accounts.  The  analysis  of  the  Factory  account 
is  shown  by  accounts  which  are  kept  in  the  factory  ledger, 
and  its  balance  should  agree  with  the  total  of  the  balances 
shown  by  the  accounts  in  the  factory  ledger. 

Factory  Ledger  Accounts 

The  following  accounts  are  kept  in  the  factory  ledger : 

( 1 )  Raw  Material  and  Supplies 

(2)  Direct  Labor 

(3)  Indirect  Expense 

(4)  Power  Costs 

(5)  Process  Costs 

(6)  Work  in  Process 

(7)  Part-Finished  Stock 

(8)  Finished  Stock 


212  COST    ACCOUNTING 

The  Raw  Material  and  Supplies  account  is  a  controlling 
account  for  the  raw  stock  records,  and  shows  in  total  what 
is  shown  by  the  raw  stock  records  in  detail.  It  is  debited 
with  all  purchases  of  raw  material  and  supplies  from  an 
analysis  of  the  "Factory"  column  in  the  register  of  accounts 
payable.  It  is  credited  with  any  allowances,  and  with  the 
total  amount  of  material  and  supplies  delivered  to  the 
operating  departments. 

The  Direct  Labor  account  is  debited  with  the  total 
amount  of  the  productive  labor  from  the  analysis  of  the 
"Factory"  column  in  the  register  of  accounts  payable,  and 
is  credited  in  total  from  the  summaries  showing  the  dis- 
tribution of  productive  labor  when  this  latter  is  charged 
either  to  the  process  costs  or  power  cost  accounts. 

The  Indirect  Expense  account  is  debited  from  an 
analysis  of  the  "Factory"  column  in  the  register  of  accounts 
payable  with  the  items  composing  the  indirect  when  these 
are  incurred,  and  is  credited  from  the  analysis  of  factory 
expenditures  with  the  distribution  of  the  indirect  expenses 
when  these  are  charged  either  to  process  costs  or  power 
costs. 

The  Power  Costs  account  is  debited  with  the  supplies 
necessary  for  repair  and  maintenance  of  the  machines,  as 
per  report  of  material  delivered ;  with  the  amount  of  the 
labor  as  per  the  time  reports  summary,  and  with  the  indirect 
expenses  chargeable  to  the  various  machines  as  per  analysis 
of  factory  expenditures.  It  is  credited  from  the  "Power 
Costs  and  Distribution  Summary"  with  the  distribution  of 
the  total  cost  when  this  is  charged  to  the  process  costs. 

The  Process  Costs  account  is  debited  with  direct  labor 
from  the  time  report  summary,  with  the  supplies  chargeable 
to  the  various  operations,  as  per  report  of  material  delivered, 
and  with  the  indirect  expenses  chargeable  to  the  various 
operations  as  per  the  analysis  of  factory  expenditures.     The 


I 


SPECIAL    ORDER    SYSTEM— PROCESS    METHOD 


213 


account  is  credited  from  the  process  card  record  summary 
with  the  distribution  of  the  total  cost  when  this  is  charged 
to  the  \\'ork  in  Process  account. 

I  The  Work  in  Process  account  is  debited  with  the 
i  amount  of  material  dehvered  to  the  operating  departments 
and  chargeable  to  the  various  orders  as  per  report  of 
material  delivered,  and  is  also  debited  with  the  distribution 
of  the  process  costs  as  per  the  process  card  recora  summary. 
The  account  is  credited  with  the  total  cost  of  the  finished 
orders  either  of  finished  stock  or  part-finished  stock,  as  per 
the  summary  of  finished  orders,  w'hen  this  is  charged  to 
the  respective  finished  stock  accounts.  The  balance  of  the 
Work  in  Process  account  represents  the  total  amount  of 
work  in  process,  and  should  agree  with  the  total  of  the  cost 
sheets  of  the  uncompleted  orders. 

The  Part-Finished  Stock  account  is  debited  from  the 
summary  of  finished  orders  with  the  total  amount  of  the 
cost  of  the  finished  parts,  and  is  credited  either  from  the 
"Summary  of  Production  Order  and  Cost  Sheet"  with  the 
total  cost  of  these  finished  parts  when  they  are  put  back 
into  operation  to  be  completed,  or  from  the  register  of 
sales  and  costs  with  the  total  cost  of  the  finished  parts  sold. 
The  balance  of  the  account  represents  the  amount  of  the 
inventory  of  the  part-finished  stock,  and  should  agree  with 
the  detailed  stock  records  of  the  finished  parts. 

The  Finished  Stock  account  is  debited  from  the  sum- 
mary of  finished  orders  with  the  total  cost  of  the  finished 
orders,  and  is  credited  from  the  register  of  sales  and  costs 
with  the  total  cost  of  sales.  The  Finished  Stock  account 
is  the  controlling  account  for  the  finished  stock  records, 
and  shows  in  total  what  is  shown  in  detail  by  the  finished 
stock  records,  the  balance  of  the  account  representing  the 
amount  of  finished  stock  on  hand. 


214 


COST    ACCOUNTING 


It  will  now  be  seen  that  if  the  factory  ledger  accounts 
have  been  posted  as  described,  and  a  list  of  the  balances 
of  these  accounts  is  prepared,  the  total  of  these  balances 
will  be  in  agreement  with  the  balance  of  the  Factory  ac- 
count in  the  general  ledger. 


\ 


QENEHAL    0 
ENT 

>    RECOnos 

KNTS 

GENERAL    LEOQEB    ACCOUNTS 
AFFECTED 

0'    Faclorj  Aoocr.) 

Or     AoO.«r,|..p.,.M, 

M.|...>l  anO   Slit. 
Otn.r  Ea 

Bec..»."g,   Slor 
1^9  B.-  Mjte't.l 

Rt.   Menial 

Bill! 

Co-rpMalion    ol 
Sheet. 

pi.ei 

(2)  ChS'O'Kg  P 

(3)  An.lTZ'ng 

ej.pef.se 

(6)  Comp.lal.o 
P.ocet. 

T.a^slf    <" 
Fiweneo  O.ae' 

Or    Salei  Clastlflcat.or..      , 
Cr    Factory  Acccr.!- 

SMo'-ent      • 

Enl'.e»  upo 
Coati. 

u.cour,ti  if,  if.e  General  ar.d  Factor,  Ledgere 

F. 

CHAPTER  XVI 

PRODUCT    SYSTEM    BASED    ON    THE 
PRODUCTIVE    LABOR    METHOD 

In  the  two  special  order  systems  the  costs  are  collected 
on  the  production  order.  In  this  system  the  costs  are 
collected  on  the  production  report. 

The  present  system  differs  from  the  last  two  systems  de- 
scribed in  its  methods  of  distributing  indirect  expense,  and 
also  in  the  fact  that  the  complete  costs  are  gathered 
departmentally  and  transferred  progressively  from  one 
department  to  another.  The  costs  in  this  system  have  no 
relation  to  customers'  orders,  as  the  goods  are  manufactured 
and  carried  in  stock,  and  orders  as  they  come  in  are  filled 
from  this  stock. 

Purchase  Forms 

The  following  purchase  forms  are  used  in  the  present 
system : 

Purchase  Requisition   (Form   i) 

Purchase  Order  (Form  2) 

These  forms  are  the  same  as  shown  in  Chapters  XIV  and 
XV,  and  may  be  used  in  this  system  unchanged. 

Report  of  Material  Received  (Form  4) 

It  will  be  noted  that  this  form  is  quite  different  from 
that  used  in  Chapters  XIV  and  XV.     In  many  cases,  where 

215 


I 


CHAPTER  XVI 

PRODUCT    SYSTEM    BASED    ON    THE 
PRODUCTIVE    LABOR    METHOD 

In  the  two  special  order  systems  the  costs  are  collected 
on  the  production  order.  In  this  system  the  costs  are 
collected  on  the  production  report. 

The  present  system  differs  from  the  last  two  systems  de- 
scribed in  its  methods  of  distributing  indirect  expense,  and 
also  in  the  fact  that  the  complete  costs  are  gathered 
departmentally  and  transferred  progressively  from  one 
department  to  another.  The  costs  in  this  system  have  no 
relation  to  customers'  orders,  as  the  goods  are  manufactured 
and  carried  in  stock,  and  orders  as  they  come  in  are  filled 
from  this  stock. 

Purchase  Forms 

The  following  purchase  forms  are  used  in  the  present 
system : 

Purchase  Requisition   (Form   i) 
Purchase  Order  (Form  2) 

These  forms  are  the  same  as  shown  in  Chapters  XIV  and 
XV,  and  may  be  used  in  this  system  unchanged. 

Report  of  Material  Received  (Form  4) 

It  will  be  noted  that  this  form  is  quite  different  from 
that  used  in  Chapters  XIV  and  XV.     In  many  cases,  where 
215 


2i6  COST    ACCOUNTING 

a  product  system  is  used,  raw  material  and  supplies  will  be 
ordered  in  large  quantities,  and  in  such  instances  the  freight 
charges  will  be  considerable.  Provision  is  therefore  made 
in  this  form  for  a  complete  distribution  of  freight  and  other 
charges  bearing  directly  on  the  cost  of  material. 

Under  the  caption  "Article,"  the  lot  number,  description, 
and  quantity  only  are  filled  out  by  the  receiving  clerk,  all 
other  columns  being  entered  in  the  office.  When  the  entry 
is  made  from  this  form  to  the  raw  stock  record,  the  cost 
will  be  the  total  cost  of  the  article  after  the  distribution  of 
charges  has  been  made. 

From  the  information  under  the  caption  "Factory 
Ledger,"  the  record  on  the  accounts  payable  voucher  will  be 
made.  The  entry  of  material  received  is  made  on  the  raw 
stock  records,  and  also  on  the  accounts  payable  voucher  in 
conjunction  with  the  invoice. 

Accounts  Payable  Forms 

For  the  present  system  these  forms  are  as  follows  : 

Accounts  Payable  Voucher  (Form  7) 
Register  of  Accounts  Payable  (Form  9) 

A  general  explanation  of  these  forms  will  be  found  in 
Chapter  XV. 

Stock  Record — Raw  Material  (Form  12) 

This  form  is  one  of  the  most  complete  records  used  for 
raw  material  stock.  As  a  mere  record  of  raw  material 
stock  received  and  delivered,  it  would  be  unnecessary  to 
have  all  the  information  called  for  by  the  form  as  shown; 
but  in  most  cases  such  additional  information  is  of  distinct 
value  to  the  management. 

The  special  feature  of  this  record  is  the  provision  made 


PRODUCT    SYSTEM 


217 


to  show  amounts  of  goods  ordered,  the  amount  reserved  for 
some  particular  purpose,  and  the  amount  of  stock  available 
for  general  manufacturing  purposes. 

The  entries  on  this  record  are  made  from  the  purchase 
order,  the  material  received  report,  and  the  report  of  material 
delivered.  The  information  under  the  caption  "Reserved" 
comes  either  from  the  purchase  requisition,  purchase  order 
or  some  other  special  source. 

Production  Order  (Form  13) 

The  "Production  Order"  in  this  system  is  intended  only 
as  an  order  to  the  factory  to  manufacture  a  certain  amount 
of  goods.  A  form  of  this  kind  should  also  be  used  for  work 
of  any  description  or  character  performed  in  the  plant,  such 
as  repairs,  improvements,  building  of  new  machinery,  etc. 
Costs  are  charged  to  such  production  orders  in  the  same 
way  as  to  the  regular  production  order. 

Material  Requisition  (Form  18) 

The  form  presented  is  intended  only  to  register  material 
taken  from  stock  according  to  department,  order  number  or 
product  chargeable,  article  and  quantity,  and  as  the  informa- 
tion on  these  records  is  transferred  to  a  summary  of 
material  requisitions  or  reports  of  material  delivered,  it  is 
unnecessary  to  price  the  articles  on  the  requisition. 

Report  of  Material  Delivered  (Form  25) 

The  material  requisitions  are  summarized  on  this  form 
according  to  department  and  order  number  or  product 
chargeable,  the  product  chargeable  being  entered  from  the 
material  requisition  as  to  classifications  of  product.  The 
report  is  priced,  this  information  being  taken  from  the  stock 
record  of  raw  material  received,  and  is  entered  on  that 
record  under  the  caption  "Delivered." 


2l8  COST   ACCOUNTING 

Employees'  Time  Report  (Form  32) 

The  form  of  time  report  selected  for  presentation  here 
requires  the  time  to  be  punched  either  by  the  workman  or 
foreman,  or  by  some  one  detailed  for  that  purpose. 

Across  the  left  end  of  the  card  are  printed  the  hours 
from  6  to  12  and  from  i  to  7,  and  the  minutes  are  printed 
beneath,  with  a  leeway  of  ten  minutes  between  each  opera- 
tion, to  provide  for  recording  the  finishing  time  of  the 
operation  just  completed,  and  the  beginning  time  of  the  new 
operation.  If  necessary,  the  design  may  be  so  ruled  as  to 
reduce  this  leeway  to  a  minimum  of  two  minutes.  Along 
the  sides  of  the  card  are  printed  the  operations  of  the  par- 
ticular plant.  Where  the  operations  are  not  numerous,  all 
operations  may  be  printed  on  all  the  cards ;  but  where  there 
are  a  large  number  it  is  wise  to  print  departmental  cards, 
each  showing  the  operations  peculiar  to  its  department. 

The  body  of  the  card  calls  for  the  order  number,  date, 
department,  employee's  number,  article,  quantity  produced, 
piece  rate,  time  rate,  premium  rate,  and  total  time.  There 
is  also  provision  for  waiting  time.  A  form  containing  only 
the  order  number,  department,  and  labor  cost  can  be  used 
in  this  system,  if  desired. 

The  information  contained  on  these  time  reports  is  trans- 
ferred to  the  pay-roll,  and  also  summarized  and  posted  to 
the  cost  sheet. 

Pay-Roil  (Form  39) 

The  pay-roll  is  used,  as  in  the  preceding  systems,  for 
ordinary  pay-roll  purposes,  and  also  for  the  distribution  of 
the  labor  into  direct,  indirect,  and  supervision.  The  total 
of  the  pay-roll  is  entered  on  the  accounts  payable  voucher 
for  distribution  to  the  factory  ledger  according  to 
department  and  account. 


PRODUCT    SYSTEM 


219 


When  the  pay-roll  entry  is  made  from  the  vouch.er  into 
the  register  of  accounts  payable,  it  is  charged  in  the 
"Factory"  column. 

Defective  Work  Report  (Form  51) 

While  the  defective  work  report  is  presented  only  in 
connection  witii  the  present  system,  it  should  be  used  in 
every  system,  as  defective  work  is  common  in  every  plant. 
In  some  plants  the  labor  cost  of  the  defective  work  is  de- 
ducted from  the  pay  of  the  employee,  and  in  very  rare 
instances  the  material  wasted  is  also  charged  to  him. 

Under  the  system  here  discussed,  the  loss  caused  by 
defective  w^ork  is  a  departmental  charge  against  indirect 
expenses,  the  account  in  the  factory  ledger  usually  appearing 
under  the  caption  "Defective  Work."  If  any  part  of  the 
material  is  to  be  used  again,  a  value  should  be  put  upon  it, 
and  this  amount  deducted  from  the  total  defective  work  cost 
and  charged  to  the  stock  records. 

Factory  Ledger  (Form  67) 

The  factory  ledger  is  used  to  classify  all  the  details  of 
factory  operations. 

A  ledger  sheet  or  page  is  used  for  each  department,  and 
a  number  of  sheets  are  used  for  general  operating  expenses, 
according  to  the  account  number.  In  addition,  sheets  should 
be  used  for  raw  material,  part-finished,  and  finished  stock, 
these  giving  the  controlling  accounts  for  the  three  classifi- 
cations of  the  stock  records. 

The  entries  under  "Material"  are  made  from  the  report 
of  material  delivered,  according  to  department.  The  in- 
formation under  "Labor"  and  "Indirect"  is  taken  from  the 
accounts  payable  voucher,  according  to  department.  Under 
the  caption  "Total  Charges"  is  shown  the  total  of  all  ex- 
penditures charged  to  a  particular  department.     Under  the 


220  COST   ACCOUNTING 

caption  "Credits"  will  be  entered  the  total  of  each  depart- 
mental cost,  as  shown  by  the  report  of  production  and  costs. 
The  balance  as  shown  by  the  factory  ledger  for  any 
operating  department  will  represent  the  value  of  the  goods 
in  process  in  that  particular  operating  department. 

Statement  of  Factory  Expenditures  (Form  43) 

The  purpose  of  this  form  is  to  show  the  operations  of 
a  factory  for  a  month  or  cost  period.  It  is  especially  suit- 
able in  a  system  where  the  productive  labor  method  is  used, 
for  determining  the  percentage  of  indirect  expense  to  be 
applied  to  the  cost  of  each  order  or  article. 

It  would  be  well  in  this  system  to  keep  an  account  in 
the  factory  ledger  of  the  indirect  expenses,  according  to  de- 
partment, charging  the  total  indirect  expenses  and  crediting 
the  department  account  each  month  with  the  percentage 
used  on  the  report  of  production  and  costs.  These  depart- 
mental indirect  expense  accounts  will  then  show  to  what 
extent  variations  exist  between  the  fixed  or  arbitrary 
percentage  and  the  actual,  and  will  thus  be  a  means  of 
correcting  the  fixed  percentage  to  a  fair  degree  of  accuracy. 

Summary  of  Production  and  Costs  (Form  54) 

The  summary  of  production  and  costs  is  used  in  ascer- 
taining the  complete  departmental  costs  of  an  order, 
including  the  indirect  expense.  Individual  reports  are  used 
for  each  department,  and  the  total  costs  of  each  department 
are  transferred  to  the  succeeding  department  until  the  final 
operations  are  completed,  when  the  total  costs  are  trans- 
ferred to  finished  stock.  The  first  department  naturally 
would  have  no  record  under  the  caption  ''Previous  Opera- 
tions" ;  but  it  should  be  borne  in  mind  that  an  article  may 
be  transferred  to  part-finished  stock  at  the  end  of  an 
operation ;  and  when  these  part-finished  articles  are  put  back 


PRODUCT    SYSTEM  221 

into  process  for  completion  their  total  cost  should  be  entered 
on  the  summary  of  production  and  costs  under  the  caption 
"Previous  Operations."  The  production  reports  may  be 
made  daily  or  weekly,  depending  on  the  nature  of  the 
product. 

The  information  for  the  summary  of  production  and 
costs  is  obtained  as  follows  : 

Under  the  caption  ''Material,"  from  the  report  of 
material  delivered,  and  under  the  caption  "Labor,"  from  the 
time  reports.  Under  the  caption  "Indirect,"  a  department 
rate  is  used  for  calculating  the  amount  on  the  basis  of  labor 
cost,  as  shown  in  the  "Labor"  column. 

In  the  production  report  proper,  the  article,  order 
number,  and  quantity  columns  are  filled  in  by  the  foreman 
of  the  operating  department,  all  other  columns  by  the  cost 
clerk.  The  totals  of  the  material,  labor  and  indirect 
columns  are  posted  to  the  credit  of  the  proper  department 
account  in  the  factory  ledger.  When  the  final  form  passes 
from  the  last  operating  department,  with  all  the  accumulated 
costs  recorded,  the  "Quantity"  and  "Total"  columns  are 
charged  to  the  finished  stock  records  under  the  proper 
classification. 

The  fundamental  principle  of  the  system,  which  is  to 
show  at  all  times  the  progress  of  any  particular  order  and 
the  cost  of  all  orders  in  process,  by  departments,  is  well 
illustrated  by  the  summary  of  production  and  cost.  If  one 
of  these  forms  is  used  for  comparative  costs,  according  to 
department  and  classification,  it  will  be  found  of  considerable 
value  to  the  management. 

Stock — Finished  Product  (Form  59) 

An  ordinary  stock  form  showing  production,  sales,  and 
l)a]ance,  could  be  used  in  this  system  instead  of  the  form 
shown;  but  as  other  information  is  frequently  required  in 


222 


COST   ACCOUNTING 


connection  with  finished  stock,  the  design  presented  here 
will  be  found  more  useful. 

The  particular  features  of  this  form  are  the  columns 
headed  "Orders  Received,"  "Orders  Cancelled,"  and 
"Unfilled  Orders."  The  information  coming  under  the 
caption  "Production"  is  taken  from  the  final  departmental 
production  report  just  described.  The  information  under 
the  captions  "Orders  Received"  and  "Orders  Cancelled"  is 
obtained  from  the  order  department,  and  the  information 
under  the  caption  "Unfilled  Orders"  is  calculated  on  the 
form.  The  information  under  the  caption  "Sales"  is  taken 
from  the  sales  sheet,  providing  the  cost  of  the  sales  is 
entered  on  the  duplicate  copy  of  that  record ;  otherwise 
it  is  taken  from  the  "Summary  of  Production  and  Costs," 
the  sales  being  taken  out  of  stock  at  cost  price. 

Other  Forms  Used 

Part-Finished  Stock  (Form  56) 

Inventory  Test  (Form  60) 

Sales  Sheet  (Form  62) 

Credit  Certificate  (Form  63) 

Register  of  Sales  and  Costs  (Form  64) 

Statement  of  Profit  and  Loss  (Form  68) 

Balance  Sheet  (Form  69) 

These  forms  are  of  the  same  general  character  as  those 
described  in  previous  chapters. 

Explanation  of  Chart  and  Summary  of  Entries 

Subsidiary  Forms  and  Records 

The  forms  necessary  in  collating  the  information  relative 
to  the  authorization  and  purchase  of  material  and  supplies 
and  the   incurring  of  other  expenditures,  and   also   those 


i 


PRODUCT    SYSTEM  223 

forms  necessary  to  record  the  receiving,  storing  and 
requisitioning  of  raw  material,  are  used  in  the  same  manner 
as  in  the  two  systems  previously  described.  The  particular 
distinction  in  recording  the  information  upon  the  sub- 
sidiary records  lies  in  the  method  of  compiling  the  cost  data, 
which  is  done  departmentally. 

The  raw  material  and  supplies  delivered  to  operating 
departments  are  charged  from  the  report  of  material  de- 
livered to  the  summary  of  production  and  cost§  of  the 
various  operating  departments.  In  like  manner  the  labor 
ct)sts  are  transferred  from  the  time  reports;  and  the  indirect 
expenses  are  distributed  upon  a  fixed  basis,  and  charged 
from  a  previously  prepared  statement  of  factory  expendi- 
tures which  shows  the  percentages  to  be  used  in  the  various 
operating  departments. 

There  are  only  three  operating  departments  used  for 
illustrative  purposes  in  this  chart,  but,  of  course,  the  same 
principle  applies  regardless  of  the  number  of  operating 
departments,  which  will  be  determined  by  the  conditions  of 
manufacture  in  the  particular  plant.  The  defective  work  of 
j  any  operating  department  should  be  reported  on  a  defective 
work  report,  and  transferred  from  the  summary  of  produc- 
tion and  costs  to  a  report  showing  the  defective  work,  and 
the  disposition  of  the  same.  The  total  cost,  as  shown  by 
the  summary  of  production  and  costs  of  each  department  in 
turn,  is  transferred  to  the  succeeding  department  as  opera- 
tions progress  until  the  work  is  completed  or  is  transferred 
as  part-finished  stock. 

In  case  of  the  manufacture  of  finished  parts,  transfers 
may  be  made  from  either  one  of  the  first  two  operating  de- 
partments to  the  part-finished  stock  record.  When  these 
parts  are  put  back  into  operation  to  be  completed,  they  are 
transferred  from  part-finished  stock  to  the  proper  depart- 
ment.     When    the    article    has    passed    through    the    final 


224 


COST   ACCOUNTING 


operating  department,  which,  in  the  case  illustrated,  is 
Department  3,  its  total  cost  is  transferred,  by  means  of  the 
summary  of  production  and  costs,  to  the  finished  stock 
records,  according  to  classification. 

The  subsidiary  forms  used  to  record  information  as  to 
the  sale  and  shipment  or  return  of  part-finished  stock  and 
finished  stock,  have  been  sufihciently  described  in  the  previous 
systems. 

Method  of  Control 

The  method  of  control  in  this  system  differs  from  the 
method  described  in  the  previous  system  in  that  the  factory 
ledger  is  made  self-balancing.  The  general  ledger  accounts 
affected  in  this  system  are  the  same  as  those  affected  in 
the  previous  one,  and  are  debited  and  credited  in  a  similar 
manner.  The  accounts  kept  in  the  factory  ledger  are  as 
follows : 

(i)   Raw  Material 

(2)  Direct  Labor 

(3)  Accounts    with    the    items    composing    the 
indirect  expenses 

(4)  Accounts    with   the   various   operating   de- 
partments 

(5)  Part-Finished  Stock 

(6)  Finished  Stock 

(7)  General  Ledger  Account 

(i)  The  Raw  Material  account  is  debited  from  the 
register  of  accounts  payable  with  the  total  purchases,  and 
with  any  material  put  back  into  stock,  as  obtained  from  the 
defective  work  report.  It  is  credited  with  allowances  and 
with  the  total  raw  material  delivered  to  operating  depart- 
ments, as  per  the  report  of  material  delivered.     The  Raw 


PRODUCT    SYSTEM 


225 


vlaterial  account  is  the  controlling  account  for  the  raw  stock 
ecorcls;  and  the  balance  of  this  account  should  agree  with 
he  total  of  the  balances  of  the  detailed  stock  records  which 
epresent  the  raw  material  inventory. 

(2)  The  Direct  Labor  account  is  debited  from  the 
egister  of  accounts  payable  with  the  total  amount  of  direct 
abor,  and  is  credited  from  the  summary  of  time  reports 
\rith  the  distribution  of  direct  labor  when  same  is  charged 
:o  the  various  operating  departments. 

(3)  The  accounts  representing  items  of  indirect  expense 
ire  debited  from  the  register  of  accounts  payable  with  the 
imount  of  expenditures  incurred,  and  are  credited  with 
;he  distribution,  as  per  the  statement  of  factory  expenditures, 
vhen  this  is  charged  to  the  various  operating  departments. 

(4)  The  accounts  with  the  various  operating  depart- 
nents  are  debited : 

(a)  With  the  total  amount  of  raw  material  as 
per  the  report  of  material  delivered 

(b)  With  the  total  amount  of  direct  labor  as  per 
time  report  summary 

(c)  With  the  total  amount  of  indirect  expenses, 
as  per  the  statement  of  factory  expenditures 

(d)  With  the  total  cost  of  any  previous  opera- 
tions upon  the  article  when  it  is  transferred  to  one 
department  from  a  previous  department,  as  per  a 
summary  of  department  transfers,  or  with  the  total 
cost  of  finished  stock  put  back  into  process  to  be 
completed 

The  department  accounts  are  credited  with  the  total  cost 
)f  the  transfers  to  a  succeeding  department,  as  per  the  de- 
)artment  transfers,  and  with  the  total  cost  of  defective 
vork,  as  per  the  defective  work  report  summary,  at  the  time 


226  COST    ACCOUNTING 

this  is  charged  to  the  Defective  Work  account.  The 
department  accounts  are  also  credited  with  the  total  cost  of 
finished  parts,  as  per  a  summary  showing  the  cost  of  these 
finished  parts  when  they  are  transferred  to  the  Part- 
Finished  Stock  account ;  and  the  final  Operating  Department 
account  is  credited  with  the  total  cost  of  the  finished  stock, 
as  per  summary,  when  it  is  charged  to  the  Finished  Stock 
account.  The  balance  of  the  Operating  Department  account 
represents  the  cost  of  the  work  still  in  process  in  each 
operating  department,  and  should  agree  with  the  detailed 
reports  of  production  and  costs  in  each  department. 

The  Defective  Work  account  is  charged  with  the  total 
cost  of  defective  work  from  the  defective  work  report  sum- 
mary, and  is  credited  with  the  total  cost  of  the  raw  material 
reclaimed  and  transferred  to  the  raw  material  records,  the 
balance  of  the  account  being  treated  as  part  of  the  indirect 
expenses. 

(5)  The  Part-Finished  Stock  account  is  debited  with 
the  total  cost  of  the  part-finished  stock,  as  per  summary,  and 
is  credited  with  the  total  cost  of  the  same  when  put  back 
into  operation  to  be  completed,  and  also  with  the  total  cost 
of  finished  parts  sold,  as  per  the  register  of  sales  and  costs. 
The  balance  of  the  account  shows  the  total  amount  of  part- 
finished  stock  on  hand,  and  should  agree  with  the  detailed 
stock  records  of  part-finished  stock. 

(6)  The  Finished  Stock  account  is  debited  with  the 
total  cost  of  finished  stock,  as  per  summary,  and  is  credited 
with  the  total  amount  of  the  cost  of  the  sales,  as  per  the 
register  of  sales  and  costs.  The  balance  of  the  account 
represents  the  total  amount  of  finished  stock  on  hand,  and 
should  agree  with  the  total  of  the  balances  of  the  detailed 
stock  records. 

(7)  The  General  Ledger  account  is  debited  with  the 
total  cost  of  the  sales,  as  per  the  register  of  sales  and  costs, 


RECORDS 
GENEHAL    DESCRIPTION 

or 
ENTRIES                 JNTS 

GENERAL    LEDGER    ACCOUNTS 
AFFECTED 

Aulhorizal.on  and   Purchase  0 

Material  and  SupDl.e.  and  incur 

Oil..,    E.p.nO.lu.65 

Or.   Factor,  Ledger 

Or.  Accounts  Pajaola 

R.C....no,    Stor.ng    and    Rtqu.J.tK 
R.«  Malar.al 

Ra.  Malarial  and   Supoiie.  perl    ''"^ 

Data  on  ih,  O.partmenlal  Summ,  No  3 
ol  Production  and  Costs. 

(1)  Cnaro.ng    Raw    Material,    0   No  3 
Laoor  Cost  and  Indirect  Eipensei""'' 

(2)  Transle-ng       the       Cumol,3 
Cost    Irom    One    Depanmenl    lo  >  No.  2 
Succeeding  Dopanment 

(3)  Reporting  Delecti.e   Produc   No.  2 

Trans!,,    of     Finished     Parts 
Finished   stock  to  the  Slock  Rec 

Transfer     o(     Finished     Parts     No.  2 
Operation                                        3 

Shipment      and      Sale     ol     Fin. 
Stock  or  Part  Finished  Stock. 

Return   ol    Finished    Stock    or 
Finished  Stock 

Entries  upon  Register  of  Sale,"" 
Costs 

Or.   Sales  Classigoations 
Cr    Faclo^  Ledger 

1 

Final  SUtam.nt..                ''"'^"I  '■'"O" 

occounu  in  the  General  and  Factor,  Ledgert 

PRODUCT    SYSTEM 


227 


when  same  is  credited  to  the  Finished  Stock  account.  The 
general  ledger  account  is  credited  from  the  register  of 
accounts  payable  with  the  total  amount  of  factory  charges, 
when  these  are  debited  to  the  accounts  with  raw  material, 
direct  labor  and  indirect  expenses.  The  balance  of  the 
General  Ledger  account  is  generally  a  credit,  and  should 
agree  with  the  debit  balance  of  the  Factory  Ledger  account 
which  is  kept  in  the  general  ledger. 


PRODUCT    SYSTEM 


227 


when  same  is  credited  to  the  Finished  Stock  account.  The 
general  ledger  account  is  credited  from  the  register  of 
accounts  payable  with  the  total  amount  of  factory  charges, 
when  these  are  debited  to  the  accounts  with  raw  material, 
direct  labor  and  indirect  expenses.  The  balance  of  the 
General  Ledger  account  is  generally  a  credit,  and  should 
agree  with  the  debit  balance  of  the  Factory  Ledger  account 
which  is  kept  in  the  general  ledger. 


CHAPTER  XVII 

PRODUCT    SYSTEM    BASED    ON 
THE    MACHINE    OR    PROCESS    METHOD 

This  system  is  similar  in  some  respects  to  that  described 
in  Chapter  XV,  so  far  as  it  relates  to  the  machine  or  process 
method,  the  principal  difference  being  that  this  is  a  product 
system,  whereas  the  other  is  a  special  order  system.  Also 
its  final  costs  are  collated  on  a  separate  cost  record,  instead 
of  on  the  production  order  and  cost  sheet.  The  present 
system  is  effective  in  factories  where  a  standard  line  is 
manufactured,  and  where  the  operations  are  well  defined 
in  their  relation  to  the  product. 

The  operating  hours,  together  with  the  costs  relating  to 
the  machine  or  process,  form  the  basis  of  the  plan  as  de- 
scribed; but  the  basis  need  not  necessarily  be  time,  as  this 
is  not  always  practical.  The  total  number  of  pounds  or 
tons,  or  any  other  unit  of  measure,  may  be  used,  and  the 
cost  per  unit  for  each  operation  ascertained.  That  is,  the 
basis  of  a  system  of  this  kind  may  be  either  time,  showing 
the  cost  per  hour,  or  quantity,  showing  the  cost  per  unit  of 
measure. 

The  purchase  requisition,  purchase  order,  accounts  pay- 
able voucher,  register  of  accounts  payable,  report  of  material 
received,  and  raw  stock  record  are  the  same  in  design  for 
this  system  as  for  the  systems  previously  described. 

Production  Order  (Form  14) 

The  production  order  illustrated  in  this  system  may  also 
be  used  as  a  material  requisition;  and  for  that  reason  the 


PRODUCT    SYSTEM— PROCESS    METHOD  229 

material  requisition  and  its  summary  are  omitted  from  the 
forms  described. 

Another  plan  which  may  be  followed  where  the  product 
is  absolutely  standard  is  the  use  of  an  ordinary  production 
order,  in  connection  with  a  bill  of  material  (such  as  shown 
in  Form  22)  instead  of  the  material  requisition. 

The  postings  to  the  raw  material  records  for  material 
used  can  be  made  either  from  the  production  order  or  from 
the  bill  of  material,  depending  on  which  is  the  more  con- 
venient ;  and  the  total  cost  of  the  material  is  charged  on  the 
cost  records  against  the  manufactured  article  or  product  for 
which  the  material  was  used. 

Employees'  Time  Report  (Form  27) 

The  time  reports  provide  for  the  registering  of  pro- 
duction according  to  operation,  and  are  applicable  where  the 
operator  works  on  a  machine,  the  labor  cost  being  charged 
to  the  machine  or  process  according  to  the  production  order 
number.  In  cases  where  the  process  cannot  be  identified 
with  a  particular  order  number,  the  time  should  be  charged 
against  the  process  and  the  name  of  the  product. 

The  time  reports  should  be  summarized  daily  for  entry 
on  the  pay-roll,  and  should  be  summarized  weekly  on  the 
analysis  of  pay-roll. 

Pay-Roil  (Form  40) 

This  form  is  an  ordinary  record,  used  for  pay-roll  pur- 
poses only.  It  is  designed  so  that  the  earnings  of  each 
employee  may  be  entered  daily. 

Analysis  of  Pay-Roil  (Form  36) 

This  form  is  used  for  analyzing  the  time  records,  and 
shows  the  productive  labor  according  to  time,  operations, 
department,  and  order  number  or  product  classification.  The 


230 


COST   ACCOUNTING 


total  labor  cost  is  entered  on  the  process  card  according  to 
department  and  operation,  and  the  total  labor  time,  classified 
according  to  the  various  operations,  is  entered  on  the  cost 
sheet  of  the  article  or  order  chargeable. 

Analysis  of  Factory  Expenditures  (Form  41) 

The  "Analysis  of  Factory  Expenditures"  is  made  out 
from  the  accounts  representing  the  indirect  expenses  which 
are  kept  in  the  factory  ledger.  Its  purpose  is  to  allocate  the 
different  items  to  their  proper  departments.  Those  classifi- 
cations of  the  indirect  expenses  which  cannot  be  charged 
to  any  particular  department,  or  are  not  distributed  to  the 
process  card  records  or  power  cost  and  distribution  records 
of  the  various  machines,  may  be  summarized  on  this  form 
and  prorated  over  the  various  operating  departments  on 
the  basis  of  productive  labor  cost,  or  productive  labor  hours. 

Forms  for  Applying  Costs 

Process  Card  Record  (Form  45) 

Power  Cost  and  Distribution  (Form  46) 

These  forms  are  described  fully  in  Chapter  XV. 

Production  Report  (Form  50) 

This  form  should  be  made  out  daily  or  weekly  (as  the 
conditions  in  the  plant  may  require)  by  each  operating  de- 
partment according  to  order  number  or  class  of  product. 
It  shows  the  total  production  of  each  operating  department 
according  to  operations. 

The  form  also  provides  for  costing  the  material  of  the 
production,  the  information  being  taken  from  either  the 
factory  order  or  the  bill  of  material,  if  one  is  in  use. 

The  total  production  for  each  operation  is  transferred  at 
the  end  of  the  month  to  the  cost  sheet,  under  the  caption 


k 


PRODUCT    SYSTEM-PROCESS    METHOD  23 1 

"Production,"  according  to  the  article  produced,  and  is 
entered  in  the  proper  column  showing  the  production, 
according  to  operation  or  department. 

Cost  Sheet  (Form  53) 

This  form  is  intended  to  be  the  final  cost  record  of  pro- 
duction. The  costs  may  be  kept  by  article  or  by  product,  a 
separate  sheet  being  used  for  each  classification. 

The  information  under  the  caption  "Production"  and 
"Quantity"  is  taken,  according  to  operations  or  depart- 
ments, from  the  production  report.  The  information  un- 
der the  caption  "Hours"  and  "Minutes,"  is  obtained  from 
the  analysis  of  pay-roll,  according  to  operations. 

The  process  rate  per  hour  is  obtained  from  the  process 
card  record.  By  multiplying  the  number  of  hours  by  the 
rate  per  hour,  the  process  cost  will  be  shown.  The  material 
cost  will  then  be  entered  from  the  production  order,  and  the 
total  cost  of  the  production  shown.  As  these  records  are 
intended  to  be  compiled  departmentally,  /.  c,  by  operating 
department,  they  should  be  summarized  on  the  same  form 
to  obtain  the  complete  cost  of  the  production,  w-hich  will 
then  be  transferred  to  the  stock  sheets  of  finished  product. 

Other  Forms  Employed 

The  following  forms  which  have  already  been  described 
are  necessary  to  complete  the  system  : 

Finished  Stock  Record  (Form  59) 
Part-Finished  Stock  (Form  56) 
Inventory  Test  (Form  60) 
Sales  Sheet  (Form  62) 
Credit  Certificate  (Form  63) 
Register  of  Sales  and  Costs  (Form  64) 
Profit  and  Loss  Statement  (Form  68) 
Balance  Sheet  (Form  69) 


232  COST   ACCOUNTING 

Explanation  of  Chart  and  Summary  of  Entries 

Subsidiary  Forms  and  Records 

The  purchase  requisition,  purchase  order,  invoice, 
accounts  payable  voucher,  register  of  accounts  payable,  re- 
port of  material  received,  and  raw  stock  record  are  used  in 
tlie  same  manner  as  in  the  preceding  system  for  the  purpose 
of  showing  the  authorization,  purchase,  receiving  and 
storing  of  material  and  supplies,  and  the  incurring  of  other 
expenditures. 

The  subsidiary  records  used  for  compiling  the  cost  data 
are  as  follows : 

(i)  Production  Order  and  Material  Requisition 

(2)  Time  Reports 

(3)  Analysis  of  Pay-Roll 

(4)  Analysis  of  Factory  Expenditures 

(5)  Power  Costs  and  Distribution 

(6)  Process  Card  Record 

(7)  Production  Report 

(8)  Cost  Sheet 

The  information  upon  the  production  order  and  material 
requisition  is  transferred  to  the  cost  sheet  to  show  the  cost 
of  material  going  into  process.  The  supplies  are  transferred 
either  to  the  power  costs  and  distribution  or  the  process 
card  record. 

The  time  reports  are  entered  upon  the  pay-roll  for  pay- 
roll purposes,  and  the  analysis  of  the  pay-roll  is  then  attached 
to  the  accounts  payable  voucher  for  entry  upon  the  register 
of  accounts  payable.  The  time  reports  are  also  entered  upon 
the  analysis  of  pay-roll,  from  which  the  information  goes 
to  either  the  power  costs  and  distribution  sheet  or  the  process 


PRODUCT    SYSTEM— PROCESS    METHOD 


233 


card  record.  The  productive  labor  time  is  entered  upon  the 
cost  sheets. 

The  information  upon  the  analysis  of  factory  expendi- 
tures is  transferred  either  to  the  process  card  records  or  to 
the  power  costs  and  distribution  record,  and  after  the  power 
costs  are  distributed  and  entered  upon  the  process  card 
records,  the  information  upon  the  process  card  records  is 
transferred  to  the  cost  sheets. 

The  production  report  shows  the  amount  of  production, 
which  is  transferred  to  the  cost  sheets. 

It  will  be  seen  that  the  cost  sheet  summarizes  the  elements 
of  costs  and  production  as  follows : 

(a)  Material  cost,  from  the  production  order 

(b)  The  cost  of  productive  labor  and  indirect 
expense,  from  the  process  card  records 

(c)  The  productive   labor  time  on   the  article, 
from  the  analysis  of  pay-roll 

(d)  The  quantity  of  the  production,   from  the 
production  report 

The  method  of  recording  information  relative  to  the 
transfer  of  finished  articles  and  finished  parts  to  the  stock 
records,  and  also  the  method  of  transferring  part-finished 
stock  back  into  operation  to  be  completed,  has  already  been 
described.  The  method  of  recording  shipments  and  sale 
of  finished  stock  and  part-finished  stock,  and  also  of  any 
return  of  stock,  has  likewise  been  described. 

Method  of  Control 

The  method  of  control  of  the  cost  records  by  the 
financial  records  is  the  same  as  used  in  the  previous  system, 
the  general  ledger  accounts  affected  being  the  same.  The 
accounts  which  are  kept  in  the  factory  ledger  are  as  follows : 


234  COST   ACCOUNTING 

( 1 )  Raw  Material  and  Supplies 

(2)  Direct  Labor 

(3)  Accounts    with    the    items    composing    the 
indirect  expenses 

(4)  Power  Cost 

(5)  Process  Cost 

(6)  Work  in  Process 

(7)  Part-Finished  Stock 

(8)  Finished  Stock 

(9)  General  ledger 

(i)  The  Raw  Material  account  is  debited  from  the 
register  of  accounts  payable  with  the  total  purchases,  and 
is  credited  with  allowances  and  with  the  total  raw  material 
and  supplies  delivered  to  operating  departments,  as  per  the 
production  order  summary.  This  summary  shows  the  total 
material  charged  against  the  various  articles  upon  the  cost 
sheets,  as  per  the  summary  of  material  requisitions,  which  in 
turn  shows  the  supplies  delivered  and  chargeable  to  the 
various  machines  and  processes.  The  balance  of  the  Raw 
Material  account  should  agree  with  the  total  balances  of 
the  detailed  stock  records  which  represent  raw  material 
inventory. 

(2)  The  Direct  Labor  account  is  debited  from  the 
register  of  accounts  payable  with  the  total  amount  of  direct 
labor,  and  is  credited  from  the  analysis  of  pay-roll  summary 
with  the  distribution  of  direct  labor,  when  same  is  charge- 
able either  to  Power  Cost  or  Process  Cost  account. 

(3)  The  accounts  representing  the  items  of  indirect 
expense  are  debited  from  the  register  of  accounts  payable 
with  the  amount  of  expenditures  incurred,  and  are  credited 
from  the  analysis  of  factory  expenditures  when  expenditures 
are  charged  either  to  the  Power  Cost  or  Process  Cost 
accounts. 


PRODUCT    SYSTEM— PROCESS    METHOD 


235 


(4)  The  Power  Cost  account  is  debited  with 

(a)  The  total  suppHes  chargeable,  as  per  sum- 
mary of  material  requisitions 

(b)  The  total  direct  labor  chargeable,  as  per  the 
analysis  of  pay-roll  summary 

(c)  The  total   indirect  expenses  chargeable,   as 
per  the  analysis  of  factory  expenditures 

The  Power  Cost  account  is  credited  with  the  distribution 
of  the  power  cost  when  same  is  charged  to  the  process  cost 
account. 

(5)  The  Process  Cost  account  is  debited  with 

(a)  The  total  supplies  chargeable,  as  per  sum- 
mary of  material  requisitions 

(b)  The   total    direct    labor   chargeable,   as   per 
analysis  of  pay-roll  summary 

(c)  The  total  indirect  expenses  chargeable,  as  per 
analysis  of  factory  expenditures 

(d)  The  total  cost  of  the  power  distributed,  as 
per  the  power  costs  and  distribution  summary 

The  Process  Cost  account  is  credited  with  the  total  cost 
of  the  labor  and  indirect  expenses  distributed,  chargeable 
to  the  Work  in  Process  account. 

(6)  The  Work  in  Process  account  is  debited  with 

(a)  The  total  cost  of  the  material,  as  per  the 
production  order  summary 

(b)  The  process  costs,  as  per  the  process  card 
record  summary 

(c)  The  total  cost  of  part-finished  stock  which 
has  been  put  into  operation  to  be  completed 

The  Work  in  Process  account  is  credited  from  the 
summary  of  cost  sheets  with  the  total  costs  of  part-finished 
stock  and  finished  stock  wdien  these  are  debited  to  the  proper 
account.  The  balance  of  the  Work  in  Process  account 
should  agree  with  the  total  balance  of  the  cost  sheets  for 


236  COST   ACCOUNTING 

the  articles  or  product  still  in  process,  and  represents  the 
inventory  of  the  work  in  process. 

The  Part-Finished  Stock,  Finished  Stock  and  General 
Ledger  accounts  are  kept  in  the  same  manner  as  in  the 
previous  system  and  need  no  further  explanation. 


J^ .      —                       .1 

SI     RECORDS 

ENTRIES                              lUNTS 

GENERAL    LEDGER    ACCOUNTS 
AFFECTED 

•ulhOfiLtior,  ird  Pu.ch.s.  ol 

Walcial  .nd  Supplies  •od  iicu.rino 

Ottlet  Eiptndilurcs 

Dr     Factory  Ledger 

Cr.   Account,   Payable 

in  aelaii 
Race'.!rtg  and  Storing  Raw  Mataiial 

flaw  Malarial  pul  irito  Opearllcn  and  ^"O"'"" 
Co-npllalioi.  ol  Coal  Data  on  Ih.  Coll 
Sheel 

(1)  Chn-Dlna  Ra.  Material  and  Sup.  S-PP'"" 

(2)  Charjing  Productive    Labor   Cost 

ar.«  Tim,. 

(3)  An.l„lng  and   Cftafjlrj   (rdlrecl 

(4)  Compiling  and  Ol3lrlbuli;lJ  Pov«ol 

Co.H 

(5)  Comoiling   «nd    Oi»»botina    Pro- 

oaaa  Costa 

Translar     ol      Finieh.d      Paris      and 
Finisr.e<.   Slock  to  Iho  Slock  Record, 

Tranale.     ol     finished     Paris    into 
Operation                                                    ;k 

Cr.   Factor,  Ledger  Accouot 

Sblpmani     and     Sal.    01    r.n.sn.d 
stock  0,   Pan  Finiabed  Slook 

Return    ol    Finished    SIOCH    or     Pari    k 
Finisheo  Stock                                              Stock 

Entries  upon  Resitler   ol    Sales  and 
Cosia 

1 

-"-  —  —• 

f 


FORMS 


CHAPTER  XVIII 

FORMS    RELATING   TO    MATERIAL 

The  forms  which  appear  in  the  following  pages  are  dis- 
cussed in,  and  illustrate  the  text  of  the  volume.  As,  how- 
ever, they  will  at  times  be  considered  apart  from  the  text,  a 
few  words  of  explanation  may  be  useful. 

In  many  cases,  forms  of  the  same  class  appear  to  be 
alike,  save  as  to  slight  variations  in  ruling  or  arrangement. 
For  the  most  part  these  differences  are  merely  suggestive 
as  showing  the  possibilities  of  detail  changes.  It  is  not  well, 
however,  to  take  their  unimportance  for  granted,  as  a  careful 
scrutiny  will  show  that,  in  some  cases  at  least,  the  variations 
are  material,  having  the  effect  of  adapting  the  form  to  some 
particular  condition  or  kind  of  manufacture. 

In  designing  forms  it  should  be  borne  in  mind  that  it  is 
hardly  possible  to  gather  cost  information  for  one  purpose 
without  at  the  same  time  procuring  information  that  can  be 
utilized  in  other  w^ays.  As  an  illustration,  it  would  not  be 
possible  to  obtain  a  list  of  the  material  used  in  manufactur- 
ing, chargeable  to  an  order  or  process,  without  at  the  same 
time  gathering  information  necessary  for  the  stock  records. 
When,  therefore,  by  a  few  trifling  additions  to  a  form  the 
information  recorded  upon  it  can  be  made  available  for  all 
tlie  purposes  for  which  such  information  is  needed,  the  sav- 
ing in  time  and  labor  is  obvious. 

No  standard  size  is  given  for  the  illustrative  forms,  nor 
is  it  necessary  to  have  the  exact  number  of  lines  or  columns 
shown.  These  details  will  depend  entirely  on  the  nature 
and  volume  of  the  business  for  which  the  form  is  devised, 
and  the  character  of  the  information  to  be  preserved. 
237 


238 


COST    ACCOUNTING 


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FORMS    RELATING   TO    MATERIAL 


239 


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240 


COST    ACCOUNTING 


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FORMS   RELATING  TO    MATERIAL 


241 


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242 


COST    ACCOUNTING 


FORMS    RELATING    TO    MATERIAL 


243 


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244 


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FORMS    RELATING    TO    MATERIAL 


245 


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246 


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FORMS    RELATING   TO    MATERIAL 


247 


ACCOUNTS    PAYABLE   VOUCHER 


No.  _. 
Favor  of Date. 


DESCRIPTION 


DEDUCTIONS 


Approved  for  Payment 


Correct 


Form  ya.     Accounts  Payable  Voucher  {face). 
{See  pages  103,  201.) 


248 


COST    ACCOUNTING 


ACCOUNTS    PAYABLE   VOUCHER 
Date No 

Favor  of 

Address 


FACTORY    LEDGER 


DEPT.    A/pNo 


GENERAL   LEDGER 


Date  Paid 
Amount  of  Check 
Deductions 
Amount  of  Invoice 


Check  No. 

$ 

$ 


CLASSIFICATION  OF 
ACCOUNTS 

OPERATING  ACCOUNTS 


1   Material 

2  Direct  Labor 

3  Indirect  Labor 

4  Supervision 

5  Supplies 

6  Liaht,  Heat  and  Power 

7  Freight,  Express  and 
Cartage 

8  Maintenance 

9  Incidentals 

10  Insurance 

11  Taxes 

12  Telegraphing  and 
Telephoning 

13  Postage,  Printing  and 
Stationery 

14  Salaries 

15  Depreciation 

16  Advertising 

17  Traveling  Expenses 

18  Commissions 

19  Legal  Expenses 

20  Interest 

21  Merchandise  Dis- 
counts 

22  Doubtful  Accounts 

23  Rent 

DCPARTMENTS 

A 

B 

C 

D 

E 

F 

G 

H 

J 

K 

L 

Form  yh.    Accounts  Payable  Voucher  {reverse). 
(See  pages  103,  201.) 


FORMS    RELATING   TO    MATERIAL 


249 


ACCOUNTS    PAYABLE   VOUCHER 


No.  _. 
Favor  of Date. 


DESCRIPTION 


DEDUCTIONS 


Approved  for  Payment 


Form  8a.    Accounts  Payable  Voucher  {face). 
^Sec  page  103.) 


250 


COST   ACCOUNTING 


ACCOUNTS    PAYABLE   VOUCHER 

Date No 

Favor  of 

Address 


FACTORY  ANALYSIS 


U- 


GENERAL   LEDGER 


Date  Paid 
Amount  of  Check 
Deductions 
Amount  of  Invoice 


Check  No. 

$ 

$ 

$ 


CLASSIFICATION  OF 
ACCOUNTS 

FACTORY  ANALYSIS 

1  Material 

2  Direct  Labor 

3  Indirect  Labor 

4  Supervision 

5  Supplies 

6  Light,  Heatand  Power 

7  Maintenance 

8  Insurance 
9Taxes    and    Water 

Rents 

10  Salaries     of     Factory 

Clerks 

11  Incidentals 

12  Depreciation 

13  Interest 

14  Rent 


i 


Form  8b.     Accounts  Payable  Voucher  (reverse). 
(See  page  103.) 


FORM 

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FORMS    RELATING    TO    MATERIAL 


253 


STOCK 


Card   No. 


Article 


Classification   No. 

Maximum 

Minimum 


QUANTITY 


ORDERED      RECEIVED      DELIVERED 


RATE         AMOUNT 


Form  10.     Raii'  Material  Stock  Record. 
{See  pages  84,  189,  202.) 


254 


COST    ACCOUNTING 


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CHAPTER   XIX 

PRODUCTION  ORDERS  AND  REOUISITIONS 


FACTORY    ORDER 

Fan.tnrv   OrHpr   Nn. 

To  Foreman 

-     Dept Date 

DATE 
WANTED 

BILL    OF   MATERIAL 
OR    MAT.    REO.    No. 

DESCRIPTION 

QUANTITY 

Completed^ Signed Supt. 

Foreman 

For))i  13.    Factory  (or  Production)  Order. 
(See  pages  87,  181,  217.) 

256 


PRODUCTION    ORDERS    AND    REQUISITIONS        257 


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PRODUCTION    ORDERS    AND    REQUISITIONS 


259 


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o 


2S0 


290 


COST  ACCOUNTING 


STATEMENT     OF     FACTO 

Accounta 

A 

B 

Dir«ot:- 

■ 

MatttUl 

5 

fl^R 

80 

42 

< 

Ubor 

4 

018 

38 

2,92 

c 

ToUl 

9 

175 

18 

335 

.r 

Labor 

80 1 

78 

197 

f~ 

Supervision 

312 

8 

5 

SuppUe. 

578 

96 

3 

Light,  HMt  »nd  Power 

21  890 

40 

37 

4 

Freight,  Eipreis  &  Cutage     (  loirarij ) 

?.f 

44 

3 

r, 

Maintenance 

1 

303 

10 

177 

2 

Incidentals 

Depreciation 

849 

26 

General  Operating  Eipenaej 

791 

IS 

58 

n 

Total 

7 

599 

h9 

i,S.-3 

Toul  Eipenditures 

" 

Material-Finished  and  in  Process      (  beginning  of  period  ) 

Grand  Total 

Cost  of  Sales 

Material-Finished  and  in  Process      (  end  of  period  ) 

Store     Room 

Oper 

Operations 

Amount 

Account 

Inventory    (  beginning  of  period  ) 

26 

173 

53 

Superlntend.nc 

Purchases 

19 

162 

53 

General  Ubor 

Total 

45 

336 

16 

Ught,  Heat  and  Power 

Delivered  to  Operating  Depts. 

8 

89S 

9i 

Insurance 

Inventory  of  Ran  Material  at  end  of  period 

36 

4S7 

24 

TViel 

Freight,  Express  i  Cartage  (Inward  ) 

Faotorj  SuppUes 

Salaries  of  Factor;  Ofhce  aerks 

Factory  Office  Supplies 

Incidentals 

Total 

AiTKOVED: 

Form  43a.     Statement  of  Factory  Expenditures  {left). 
(See  pages  109,  220.) 


NOTE.— For  Form  42  see  page  292, 


t 


SUMMARIES  OF  PRODUCTION 


291 


:XPENDITURES. 

for  the  taonth  of 

J9.-.. 

Departments 

C 

K 

P 

0 

Total 

1 

1  fisL 

li 

S 

0i6 

,•5.^ 

119 

30 

,S' 

898 

(in 

1   .-170 

SO 

s 

S67 

9S 

1 

093 

66 

412 

70 

879 

94 

K 

936 

40 

m 

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9H 

SO 

093 

66 

412 

70 

999 

24 

19 

835 

32 

.-iw 

.-;:? 

253 

9i 

i 

839 

86 

179 

60 

m 

n 

59 

34 

24 

64 

200 

82 

975 

44 

71 

52 

m 

7'Z 

168 

96 

292 

S4 

86 

1 

328 

42 

1:9 

230 

00 

71 

80 

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IS 

84 

64 

3 

623 

92 

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86 

5 

88 

2 

46 

7 

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70 

34 

1 

095 

36 

341 

86 

142 

90 

407 

68 

■i 

084 

84 

64 

10 

45 

90 

110 

00 

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566 

18 

94 

36 

94 

36 

1 

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24 

r.f, 

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89 

211, 

H 

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69 

173 

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152 

12 

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97 

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10 

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18 

35 

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85 

352 

36 

35 

790 

06 

49 

562 

30 

• 

tpensei 

Distribution 

Amount          { 

Total 

Departments 

% 

Amount 

174 

32 

No.   A 

79-1 

T3 

947 

10 

B 

58 

m 

131 

10 

0 

269 

6k 

375 

14 

1, 

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81 

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83 

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5% 

109 

45 

¥ 

SO 

69 

16 

21 

a 

173 

18 

115 

00 

10 

72 

27 

16 

2 

152 

12 

Total 

152 

13 

COEKECTi 

Form  43&.    Statement  of  Factory  Expenditures  (right). 
(See  pages  109,  220.) 


292 


COST    ACCOUNTING 


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SUMMARIES    OF    PRODUCTION    AND    COST 


293 


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SUMMARIES    OF    PRODUCTION    AND    COST 


295 


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_i 
< 
1- 
0 

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1 
to 

296 


COST    ACCOUNTING 


POWER    COSTS    &    DISTRIBUTION 

For  the  ueriod 191 

Rental  Charge 

Machine  No.  1 

A 

Depreciation 

Machine  No.  2 

A 

License 

Machine  No.  3 

A 

Inspection 

Machine  No.  4 

B 

Insurance 

etc. 

C 

Fuel 

etc. 

Water 

Repairs 

Oil,  Waste,  etc. 

Engineer 

Firemen 

Incidentals 

Etc.. 

TOTAL 

" 

Horse-Power  Hours 

Horse-Power  Distributed 

Horse-Power  Developed 

Horse-Power  Loss  and  Transmission 

Cost  per  Horse-Power  Hour 

Form  46.    Power  Cost  and  Distribution  {Process  and  Machine 
Cost  Record).     {See  pages  iii,  207.) 


SUMMARIES    OF    PRODUCTION    AND    COST  297 


PRODUCTION    REPORT               No. 
.  Oepartmenl.     Room Date 


0 


0 


OPERATION 


PRODUCTION 


MADE  DEFECTIVE  GOOD 


Form  47.    Production  Report  or  Summary.     (See  page  112.) 


298 


COST    ACCOUNTING 


REPORT  OF  PRODUCTION  AND  COSTS                                          ^^ 

_ Department                                                        

Operation _ , For  the  Week  ending ,—    —  19 

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SUMMARIES   OF   PRODUCTION    AND   COST         299 


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SUMMARIES    OF    PRODUCTION    AND    COST 


301 


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302 


COST    ACCOUNTING 


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SUMMARIES    OF    PRODUCTION    AND    COST 


303 


i 


§•! 


^ 


^ 


304 

COST    ACCOUNTING 

Report    of    Production   and    Costs 

Bept. 

Machines 

Production 

No. 

In  a.. 

Artld. 

QuMUty 

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Amoun 

Forn 

NOTE:     For  F 

orm  54 

Cos 

see  paj 

Shcc 

?e  306. 

t  (left). 

(See  pa^ 

;e 

11  = 

■) 

1 

SUMMARIES  OF  PRODUCTION 


305 


For    the                                                         enfUnc                                            19 

BCt  Labor 

Material  Dsed 

Indirect 

' 

Rote 

Amount 

Artiola 

QUMUI7 

Rate 

Atnouut 

% 

Amount 

. 

1 

Form  ^^h.    Cost  Sheet  (right).     (Seepage  115.) 


3o6 


COST    ACCOUNTING 


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CHAPTER  XXII 

FORMS    RELATING   TO    FINISHED    PRODUCT, 
SALES  AND  FINANCIAL  RECORDS 


STOCK-FINISHED 

PRODUCTS   AND    PARTS 

Maximum 

stylo Minimum 

Article                                                 _               .      _      _ 

PRODUCED 

USED    OR   SOLD 

BALANCE 

DATE 

QUANTITY 

COST 

AMOUNT 

QUANTITY 

AMOUNT 

QUANTITY 

AMOUNT 

Form  56.    Finished  Stock  Record  {Record  for  Part-Finished 

and  Finished  Stock).     (See  pages  116,  192.) 

307 


3o8 


COST    ACCOUNTING 


1                                                      FINISHED  PART  PRODUCT                      Sheet  No 

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Article Department 1 

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FINISHED    PRODUCT,    SALES    AND    FINANCIAL 


309 


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DESCRIPTION 


CLASSIFICATION 


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FINISHED    PRODUCT,    SALES    AND    FINANCIAL      315 


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322                                 COST 

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FINISHED    PRODUCT,    SALES    AND    FINANCIAL 


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324                                   COST    ACCOUNTING 

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FINISHED    PRODUCT,    SALES    AND    FINANCIAL 


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INDEX   OF   FORMS 


Accounts  payable 

register  of,  251,  252 

voucher,  247-250 
Analysis 

of  cost  of  sales,  318,  319 

of  factory  expenditures,  289 

of  pay-roll,  283,  284 
Assets  and  liabilities,  statement  of, 
324,  325 


B 


Daily  time  reports,  272,  273,  275- 

282 
Defective  work  report,  301 


Employee's  time   report,  2-]^,  276, 

278,  279 
Estimated  costs,  schedule  of,  302 


Balance  sheet,  324,  325 

Billing  and   shipping  record,  313- 

315 
Bill   of  material,   268,   269      (See 

also  "Material  requisition") 


Certificate,  credit,  316,  317 

Cost  of  sales,  analysis  of,  318,  319 

Cost  sheet,  302-306 

and  production  order,  258-261 
Costs 

schedule  of  estimated,  302 

selling 
statement  of,  320 
Credit  certificate,  316,  317 


Factory  expenditures 

analysis  of,  289 

statement  of,  289-294 
Factory  (or  operating)  ledger,  321 
Factory     (or    production)     order, 

256-263 
Finished  stock  record,  307-310 


Inventory  sheet,  312 
Inventory  test,  311 


Journal,  purchase,  245,  246 


328 


INDEX  OF  FORMS 


329 


Ledger,  factory,  321 

M 

Machine  cost,  and  process  record, 

295,  296 
Material 
bill  of,  268,  269 
delivered,  report  of,  270,  271 
raw,   record   of,  253-255 
received 

report  of,  241-244 
sheet,  241-244 
requisitions,  264-269 
summary  of,  270 
IMonthly  profit  and  loss  statement, 

322,  323 
Monthly   statement   of   assets   and 
liabilities,  324,  325 


Operating  (or  factory)  ledger,  321 
Order 

factory  or  production,  256-263 

purchase,  239,  240 


Part-finished  stock  record,  307-310 
Pay-roll,  285-288 

analysis  of,  283,  284 
Plant  and  tool   record,  326,  327 
Power  cost  and  distribution,  296 
Process  and  machine  cost  record, 

295,  296 
Process  card  record,  295 
Production  and  costs,  summary  of, 

298-300,  304 
Production     (or    factory)     order, 

256-263 


Production  order  and  cost  sheet, 

258-261 
Production  report    (or  production 

summary),  297-300,  304 
Profit  and  loss  statement,  322,  323 
Purchase  journal,  245,  246 
Purchase  order,  239,  240 
Purchase  requisition,  238 


Raw  material  stock  record,  253-255 

Register 
of  accounts  payable,  251,  252 
of  sales  and  costs,  318,  319 

Report 

defective  work,  301 
material  delivered,  270,  271 
material  received,  241-244 
production,  297-300,  304 
time,  272-282 

Requisitions 

material,  264-269 

summary  of,  270 
purchase,  238 


Sales 
analysis  of,  318,  319 
and  costs,  register  of,  318,  319 
Salesmen's  costs,  record  of,  320 
Schedule  of  estimated  costs,  302 
Self-figuring  time  card,  280-282 
Shipping  and   billing   record,   313- 

315 
Statement 
of  assets  and  liabilities,  324,  325 
of  factory  expenditures,  289-294 
of  profit  and  loss,  322,  323 
of  sales  and  selling  costs,  320 
Stock  record 
part-finished   and  finished  prod- 
uct, 307-310 
raw  material,  253-255 


330 


INDEX  OF  FORMS 


Summary  self-figuring,  280-282 

of  material  requisitions,  270  weekly,  274 

production,  297-300,  304  Tool  and  plant  record,  326,  327 

production    and    costs,    298-300, 
304 

Voucher,    accounts    payable,    247- 
T  250 

Voucher  register,  251,  252 
Test,  inventory,  311 
Time  reports,  272-282 
daily,  272,  273,  275-282  Weekly  time  report,  274 


INDEX 


Accounts  payable 
register  of,  104,  202 
Forms,  251,  252 
voucher,  103,  201 
Forms,  247-250 
Accuracy   of   stock    records,    test- 
ing, 91 
Administrative  expenses,  30,   129 
Analysis 
of  cost  of  sales,   118,   168,   174, 
183,  193 

Forms,  318,  319 
of  factory  expenditures,  109,  204, 
230 

Forms,  289-294 
of  operations,  48 
of  pay-roll,  108,  182,  229 
Forms,  283,  284 
Application  of  cost  principles,  23, 

46 
Applying  cost  charges,  basis  of,  46 
Assembling  department,   examina- 
tion of,  150 
Assets  and  liabilities,  statement  of, 
131,  199 
Forms,  324,  325 

B 

Balance,  sheet,  131,  199 

Forms,  324,  325 
Bill  and  shipping  order,  117,  193 


Forms,  313-31S 
Bill  of  material,  90,  182     (See  also 
"Material  requisition") 
Forms,  268,  269 
Bonus  plan  of  paying  wages,  75 
Burden,  expense,  25 
By-products,  50 


Cancelled  and  received  order  stock 
record,   116 
Forms,  310 
Certificate,  credit,  118,  193 

Forms,  316,  317 
Charges 
direct,  24 

indirect,    25      (See    also    "Dis- 
tribution") 
Charts  of  cost  systems 
explanation  of,  161 
product  system 

machine    or    process    method, 
236a 

explanation  of,  232 
productive  labor  method,  226a 
explanation  of,  222 
special  order  system 
machine    or    process    method, 
214a 

explanation  of,  209 

productive  labor  method,  198a 

explanation  of,  194 


331 


2>^^ 


INDEX 


Classification 
of  administrative  expenses,   129 
of  cost  systems,  47 
of  indirect  expense,  25 
of    manufacturing    departments, 

49 
of  production  costs,  24 
Cole,  William  Morse — "Interest  in 
Its  Relation  to  Costs,"  34-40 
Commercial  expenses,  30 
Compiling  the  cost  data,  101-126 
factory     ledger     accounts     em- 
ployed, 120 
illustrative  journal  entries.  124 
records     and     forms     generally 
used,  loi 
Contract  system  of  paying  wages, 

78 
Control  of  cost  records,  123,  127- 

133,  163,  196,  211,  224,  233 
Control  of  cost  records  by  financial 
records,  127-133 
administrative  expenses.  129 
balance  sheet,  131 
methods     of     controlling     cost 

records,  127 
monthly    profit    and    loss    state- 
ment, 130 
plant  and  tool  records,  133 
sales  accounts,  128 
salesmen's  costs,  132 
selling  expenses,  128 
Co-operation  of  management  and 

employees,  155 
Cost  accounting,  general  functions 

of,  21 
Cost  accounts  as  related  to  general 

accounts,  21 
Cost  data 

compiling  the,  101-126 
journalization  of,  125 
Cost    finding    and    its    functions, 
19-23 
application  of  cost  principles,  23 


cost    accounting    as    related    to 
general  accounting,  21 

functions  of  a  cost  system,  22 

general    functions    of    cost    ac- 
counting, 21 

various      phases     of     efficiency 
progress,  20 
Cost  finding,   principles  and  gen- 
eral methods  of,  46-53     (See 
also  "Cost  systems") 

analysis  of  operations,  48 

applying  cost  charges,  46 

calculating  costs,  46 

direct    production    departments, 

49 
distribution  of  indirect  expenses, 
51   (  See  also  "Distribution") 
indirect  production  departments, 

50 
labor  costs,  51 
machine  cost  method,  47 
material  costs,  50 
types  of  systems,  47 
Cost  finding  systems    (See  "Cost 

systems") 
Cost  journal,  120 
Cost  of  sales,  analysis  of,  118,  168, 
174,   193 
Forms,   318,   319 
Cost  period,  158 
Cost,  prime,  2>2 
Cost  principles,  application  of,  23, 

46 
Cost  records 
and  financial  records 
interlocking,  21,  127-133 
relations  between,  21 
control  of,  123,  127-133,  163,  196, 

211,  224,  233 
list  of,  102 

progressive,  115,  220 
Forms,  304 
Cost  sheet,  114.  167,  I73,  220,  231 
Forms,  302-306 


INDEX 


333 


and    production    order,   89,    190, 
192,  202,  208 
Forms,  258-261 
Cost  systems 

classification  of  entries,  162 
departmental,  160,  178-185 
devising,  155-165 
ends  attained,  22 
estimating,  159,  166-177 
first  plan,  167 

verification,  168 
second  plan,  171 

verification,  172 
third  plan,  172 

verification,  175 
product  system 

machine    or    process    method, 
46,  160,  228-236 
chart,  236a 
productive   labor   method,   46, 
160,  215-227 
chart,  226a 
special  order  system 

machine    or    process    method, 
46,  160,  200-214 
chart,  214a 
productive    labor    method,    46, 
160,  186-199 
chart,  198a 
types  of,  47 
Costs 
and     production,     summary     of, 
112,  115,  220,  230 
Forms,  298-300,  304 
basis  of  application,  46 
elements  of,  24-32 

relations  of  to  selling  price,  2)^ 
diagram,  31 
installation,  machinery  and  tools, 

29 
interest  in  its  relation  to,  33-45 
labor,  51,  136 

recording,  80,  92-100 
material,  50 


recording,  81-92 
power,  28 

and  distribution,  207 
Forms,  296 
schedule  of  estimated,  114,   167, 
173 
Forms,  302 
scrap  value,  50 
selling,   30,   118,   128 
statement  of,  132 
Forms,  320 
Credit  certificate,  118,  193 
Forms,  316,  317 


Daily  time   reports,  95-100      (See 
also  "Time  reports") 
Forms,  2-j2,  27;^,  275-282 
Day  rate  method  of  paying  wages, 

71 
Defective  work,  30 
reports  of,   113.  219 
Forms,  301 
Departmental    cost    systems,    160 
178-185 
conditions  where  applicable,  179 
department  accounts,  183 
forms  used  in,  180 
methods  and  principles,  179 
scope  of,  160,  178 
work  in  process  method.  184 
Departments      (See   also    "Exam- 
ination of  plant") 
direct  production,  49 
indirect  production,  50 
operating,  49 
Depreciation,  26 

distribution  over  cost,  27 
Devising    a    cost    system,    155-165 
(See  also  "Cost  systems") 
charts  of  cost  systems,  161 
co-operation  of  management  and 
employees,  155 


334 


INDEX 


cost  period,  158 
departmental  system,  160 
estimating  cost  systems,  159 
fitting    the    system    to    existing 

conditions,  156 
forms  and  designs,  164 
general    description    of    entries, 

162 
general  outline  of  systems,  159 
method  of  control,  163 
red  tape,  157 

reports  for  executives,  158 
special   order  and  product  sys- 
tems, 160 
subsidiary  records,  163 
Diagram,  relation  of  costs  to  sell- 
ing price,  31 
Dickinson,  A.  Lowes— "Interest  in 

Its  Relation  to  Costs,"  40-44 
Dies  and  small  tools,  29 
Differential  bonus  plan,  wage  sys- 
tem, 76 
Differential   rate  plan,   wage    sys- 
tem, 74 
Direct  charges,  24 
Direct  expense,  25 
Direct  labor,  24,  51,  54,  56,  58,  136 

under  process  plan,  51 
Direct  productive  departments,  49 
Distribution  of  indirect  expenses 
departmentally,  52 
depreciation,     maintenance     and 

repairs,  2"] 
direct    labor   and    material    cost 

method,  58 
direct  labor  cost  method,  54 
direct  labor  hours  method,  56 
elements  to  consider  in  choice  of 

method,  52,  53 
experimental  work,  29 
fixed  machine  rate  method,  64 
forms  for,   no 
interest,  30 
methods  of,  51,  54-69 


miscellaneous,  68 
new  machine  rate  method,  60 
new  pay  rate  method,  58 
old  machine  rate  method,  59 
power  costs,  28 

process  or  machine  method,  46 
productive  labor  method,  46 
rent,  taxes  and  insurance,  26 
small  tools,  29 
Dry  kilns,  investigation  of,  143 


Efficiency,  20,  137 
Elements  of  costs,  24-32 
administrative  expenses,  30 
depreciation,     maintenance    and 

repairs,  26 
diagram    of    cost    and    selling 

price,  31 
direct  charges,  24 
experimental  work,  29 
indirect  charges,  25 
indirect  expense,  25 

items   composing,  26 
interest,  30 

over,  short  and  damage,  30 
power  costs,  28 
production     costs     and     selling 

costs,  30 
relation  of  cost  elements  to  sell- 
ing price,  32 
rent,  taxes  and  insurance,  26 
small  tools.  29 
Employees   and   management,   co- 
operation of,  155 
Employees'    time    reports       (See 

"Time  reports") 
Estimated  costs,  schedule  of,  114, 
167,  173 
Forms,  302 
Estimating  cost  systems,  159,  166- 
177 
advantages  of,  166 


INDEX 


335 


first  plan.  167 

forms  used.   167 

verification,  168 
purposes  and  kinds,   166 
second  plan.   171 

forms  and  records  used.   171 

verification,   172 
third  plan,  172 

forms  and  records  used,  173 

verification,  175 
Examination  of  plant,  I34-I54 
efficiency.  I37 
indirect  expenses,  137 
labor,  136 
leaks,  139 

mechanical  aids,  138 
organization,  138 
power,  machinery  and  processes, 

136 
procedure,  I34,  MO 
raw    materials    and    storeroom, 

13s 
reasons  for,  134 
schedule  of  questions  for,  141- 154 

assembling,  150 

dry  kilns,  143 

foundry,   149 

general,  152 

manufacturing       departments, 

144 
packing  department,   151 
plating-room,  150 
power  department,  143 
purchase  division,  141 
receiving  department,  141 
repair  department,  149 
sales  division,  152 
shipping  department,  151 
storeroom.  142 
wood- working  shops,   150 
ventilation,  139 
Executives,   reports   for,   158 
Expense    account,     indirect,     121, 
125,  126 


Expense 

direct,  24 

indirect,  25.  it,  46,  SL  54-69.  109. 
137  (See  also  "Distribution") 
Expenses 

administrative,  30,  129 

commercial,  30 

selling,  30,  118,  128,  132 
Experimental  work,  29 


Factory  costs,  final.  31,  2>2 
Factory  expenses 

analysis  of,  109,  204.  230 

Forms,  289-294 
statement  of,  log,  204,  220,  230 
Forms,  289-294 
Factory  ledger,  120,  219 
Forms,  321 
accounts,  120,  211 
controlling  accounts,  123,  127 
Factory   order,   87,    181,    190,   202, 
208,  217,  228 
Forms,  256-263 
Financial  records 
and  cost  records 

interlocking.  21,  127-133 
relations  between,  21 
used  in  cost  finding,  lOi 
Finished     product     stock     record, 
116,  192,  221 
Forms,  307-310 
Finished  stock  account,  123,  126 
Fixed  machine  rate,  64 
Forms     and     records,     subsidiary, 

163.  194,  209,  222,  232 
Forms  for  cost  systems,  comment 
on,  164,  167,  180,  187,  200,  216, 
228 
Foundry,  examination  of,  149 


Gantt  system  of  paying  wages,  76 


336 


INDEX 


General  or  private  ledger  account, 

123 
Gillette  and   Dana  bonus   plan   of 

paying  wages,  76 
Goods  returned,  costing,  118 


Journal 
cost,  120 

entries,  illustrative,   124 
purchase,  102,  171,  174,  181, 
Forms,  245,  246 

Journalizing  cost  data,  125 


189 


Illustrative  journal  entries,  124 
Independent  check  on  material  re- 
ceived, 83 
Indirect  charges,  25 
Indirect  expense,  25,  2^,  46,  51,  54- 
69,  109,  137 
account,  121,  125,  126 
distribution  of,  51,  54-69     (See 

also  "Distribution") 
items  composing,  26 
Indirect  material,  25 
Indirect    production    departments, 

50 
Installation  charges,  29 
Insurance,  26 

Interest  in  its  relation  to  cost,  30, 
33-45 
bibliography,  44 
interest  a  profit — not  a  cost     (A. 

Lowes  Dickinson),  40 
interest  as  a  charge  against  costs 

(William  Morse  Cole),  34 
should    interest    be    included    in 
cost?  2,2, 
Interlocking     cost     records     with 

financial  records,  21,  127-133 
Inventory,  perpetual,  85     (See  also 

"Stock  record") 
Inventory  sheet,  167,  173 

Forms,  312 

Inventory  test,  91,  194 

Forms,  311 


J 


Job  account,  125,  126 


Kilns,  dry,  investigation  of,  143 


Labor 

account,  121,  125 

costs,  51,  136 

recording,  80,  92-100 

direct,  24,  51,  54,  56,  58,  136 

indirect,  25 
Leaks,  139 

Ledger,  factory,  120,  219 
Forms,  321 

accounts,  120,  211 

controlling  account,  123,  127 
Locating  stock,  85 

M 

Machine   or    process   cost    record, 
III,  205,  207 
Forms,  295,  296 
Machine  or  process  method 
product    system,    46,    160,    228- 
236 

chart,  236a 
special    order    system,    46,    160, 
200-214 
chart,  214a 
Machine  rate  method  of  distribut- 
ing indirect  expenses 
new  method,  60 
old  method,  59 
Machinery,  examination  of,   136 
Maintenance,  26 


I 


INDEX 


Z?>7 


Manufacturing  departments 
examination  of,  144 
list  of,  49 
Manufacturing   operations,   analy- 
sis of,  48 
Material 
bill  of,  90,  182 

Forms,  268,  269 
costs,  50 

recording,  81-92 
delivered,    report    of,    105,    174, 
190.  203,  217 
Forms,  270,  271 
direct,  24 
indirect,  25 
received 

report  of,  83,  188,  201,  215 

Forms,  241-244 
summary,  105 
requisitions,  89,  174,  190,  203,  217 
Forms,  264-269 
summary  of,   106,  174 
Forms,  270 
returned  to  storeroom,  90 
scrap  value,  50 
Methods 
of  controlling  cost  records,  127- 

U3,  163,  196,  211,  224,  233 
of  cost  finding     (See  "Cost  sys- 
tems") 
of  distributing  indirect  expenses, 
51,    54-69      (See    also    "Dis- 
tribution") 
Methods  of  paying  wages 
bonus  plan,  75 
contract  system,  78 
day  rate,  71 

differential  bonus  plan,  76 
differential  rate  plan,  74 
Gantt  system,  76 
Gillette  and  Dana  bonus  plan,  76 
miscellaneous  bonus  plans,  yy 
piece-work  plan,  72 
premium  plan,  75 


profit-sharing  plan,   78 
stint  system,  yy 
stock  distributing  plan,  78 
Miscellaneous  bonus  plans  of  pay- 
ing wages,  77 
Monthly  profit  and  loss  statement, 
130,  176,  198 
Forms,  322,  323 
Monthly   statement   of  assets   and 
liabilities,  131,  199 
Forms,  324,  325 

N 

Non-productive  labor,  25 

O 

Operating  departments,  list  of,  4^ 
Operating  (or  factory)  ledger,  120, 
219 

Forms,  321 
Operations,  manufacturing,  analy- 
sis of,  48 
Order 
account,  125,  126 
factory  or  production,   87,    180, 
190,  202,  208,  217,  228 
Forms,  256-263 
purchase,  82,  187,  201 

Forms,  239,  240 
systems,     special       (See     "Cost 
systems") 
Overhead,  25 

Over,  short  and  damage  account, 
30 


Packing  department,   examination 

of,   151 
Fart-finished    stock    account,    123, 

126 


338 


INDEX 


Part-finished    stock     record,     ii6, 
192,  221 

Forms,  307-310 
Pay-roll,    106,    172,    175,    191,   204, 
218,  229 

Forms,  285-288 
analysis  of,  108,  182,  229 
Forms,  283,  284 
Perpetual  inventory,  85   (  See  also 

"Stock  record") 
Piece-work  plan,  72 
Plant,     examination     of,     134-154 

(See  also  "Examination") 
Plant  and  tool  record,  133 

Forms,  326,  327 
Plating-room,  examination  of,  150 
Power  costs,  28 
and  distribution,  207 
Forms,  296 
Power    department,     examination 

of,  136,  143 
Premium  plan  of  paying  wages,  75 
Prime  cost,  32 

Principles  and  general  methods  of 
cost  finding,  46-53     (See  also 
"Cost  finding") 
Private    or    general    ledger    ac- 
count, 123 
Process  and  machine  cost  record, 
III,  205,  207 
Forms,  295,  296 
Process  card  record,  205 

Forms,  295 
Product  system — machine  or  pro- 
cess method,  46,  160,  228-236 
chart,  236a 

explanation  of,  232 
forms  and  records  used,  228 

subsidiary,  232 
method  of  control,  233 
Product  system — productive  labor 
method,  46,   160,  215-227 
chart,  226a 
explanation  of,  22^ 


forms  and  records  used,  215 

subsidiary,  222 
method  of  control,  224 
Production  and  costs,  summary  of, 
112,  115,  220,  230 
Forms,  298-300,  304 
Production  costs 
and  selling  costs,  30 
elements    of,    24-32      (See    also 
"Elements") 
Production  departments 
direct,  49 
indirect,  50 
Production  order,  87,  181,  190,  202. 
208,  217,  228 
Forms,  256-263 
Production  order  and  cost  sheet, 
89,  190,  192,  202,  208 
Forms,  258-261 
Production  report    (or  production 
summary),   iii,  220,  230 
Forms,  297-300,  304 
Productive   labor   method   of   cost 
finding     (See  "Cost  systems") 
Profit  and  loss  statement,  130,  176, 
198 

Forms,  322,  323 
Profit     sharing     plan     of     paying 

wages,  78 
Progressive  cost  record,  115,  220 

Forms,  304 
Purchase    journal,    102,    171,    174, 
181,  189 
Forms,  245,  246 
Purchase  order,  82,  187.  201 

Forms,  239,  240 
Purchase  requisition,  82,  187,  200 
Forms,  238 


Raw  matenal 

and  storerooms,  examination  of, 
135 


i 


INDEX 


339 


and  supplies  account,  121,  125 
Raw  material  stock  record,  84,  189, 

202,  216 
Forms,  253-255 

Received     and     cancelled     order 
stock  record,   116 
Forms,  310 
Receiving     department,     examina- 
tion of,  141 
Recording  material  and  labor  costs, 
80-100 
labor  cost,  92 

forms  used,  92-95 
requisites  of  time  reports,  93 
material  cost,  81 
forms  used,  82 
requirements  of  cost  finding,  80 
Records 

cost,  list  of,  102 
financial,   list   of,   loi 
subsidiary,  163,  194,  209,  222,  232 
Register 

of  accounts  payable,  104,  202 

Forms.  251,  252 
of  sales  and  costs,  118,  168,  174, 
183,  193 
Forms,  318,  319 
Rent,  26,  40 
Repair     department,     examination 

of,  149 
Repairs,  26 
Reports 
defective  virork,  113,  219 

Forms,  301 
for  executives,  158 
material  delivered,  105,  174,  190, 

203,  217 
Forms,  270,  271 

material   received,   83,    188,   201, 
215 

Forms,  241-244 
production,  in,  220,  230 

Forms,  297-300,  304 
time  (  See  "Time  reports") 


Requisitions 

material,  89,   174,   190,  203,  217 
Forms,  264-269 
summary  of,   106,  174 
Forms,  270 
purchase,  82,  187,  200 
Forms,  238 
Returned  goods,  costing,  118 
Returned  material,  90 


Sales 
accounts,   128 
analysis  of,   118,   168,   174,   193 

Forms,  318,  319 
and  costs,   register  of,   118,   168, 
174,  183,  193 
Forms,  318,  319 
Salesmen's   costs,   record   of,    132 

Forms,  320 
Schedule  of  estimated  costs,   114, 
167,  173 
Forms,  302 
Scrap  values,  50 
Self-figuring  time  card,  98 

Forms,  280-282 
Selling  expenses,  30,  118,  128,  132 
Selling   price    in    relation    to   cost 
elements,  32 
diagram,  31 
Shipping  department,  examination 

of,  151 
Shipping  order  and  bill,  117,  193 

Forms,  313-315 
Shrinkage,  30 
Small  tools,  29 
Special  dies  and  tools,  29 
Special   order   system — process   or 
machine  method,  46,  160,  200- 
214 
chart,  214a 

explanation  of,  209 


340 


INDEX 


factory  ledger  accounts,  211 
forms  and  records  used,  200 

subsidiary,  209 
method  of  control,  211 
Special    order    system — productive 
labor  method,  46,  160,  186-199 
balance  sheet,  199 
chart,  198a 

explanation   of,   194 
forms  and  records  used,   187 

subsidiary,  194 
method  of  control,  196 
profit  and  loss  statement,  198 
Statement 
of  assets  and  liabilities,  131,  199 

Forms,  324,  325 
of  factory  expenditures,  109,  204, 
220,  230 

Forms,  289-294 
of  profit  and  loss,  130,  176,  198 

Forms,  322,  323 
of  sales  and  selling  costs,  132 
Forms,  320 
Stint  system  of  paying  wages,  'J^ 
Stock,  locating,  85 
Stock  record 
finished  and  part-finished  prod- 
uct, 116,  192,  221 
Forms,  307-310 
raw  material,  84,  189.  202,  216 
Forms,  253-255 
Stock    records,   verifying,    86,    91, 

194 
Storeroom 
and  ravvr  material,  135,  142 
examination  of,   142 
material  returned  to,  90 
Sub-production  order,  88 
Subsidiary  forms  and  records,  163, 

194,  209,  222,  232 
Summary 
of  material  received,  105 
of  material  requisitions,  106,  174 
Forms,  270 


production,  in,  220,  230 
Forms,  297-300,  304 
production  and  costs,    112,    115, 
220,  230 

Forms,  298-300,  304 
Supplies  and  raw  material  account, 

121,  125 
Systems,  cost  finding 
classification  of  entries,  162 
departmental,  160,  178-185 
devising,  155-165 
ends  attained,  22 
estimating,  159,  166-177 
first  plan,  167 

verification,  168 
second  plan,  171 

verification,  172 
third  plan,  172 
verification,  175 
product  system 

machine    or    process    method, 
46,  160,  228-236 
chart,  236a 
productive    labor   method,   46, 
160,  215-227 
chart,  226a 
special  order  system 

machine    or    process    method, 
46,    160,   200-214 
chart,  214a 
productive    labor    method,   46, 
160,  186-199 
chart,  198a 
types  of,  47 
Systems    of   paying    wages,    70-79 
(See  also  "Wage  systems") 


Taxes,  26 

Test,  inventory,  91,  194 

Forms,  311 
Time  reports,  93-100,  175,  182,  191, 
204,  218,  229 

Forms,  272-282 


INDEX 


341 


daily,  95-ioo 

Forms,  272,  273,  275-282 
forms  of,  95 

relation  to  wage  systems,  94 
requisites  of,  93 
self-figuring,  98 

Forms,  280-282 
weekly,  96 

Forms,  274 
Tool  and  plant  record,  133 

Forms,  326,  Z'^l 
Tools,  small,  29 
Types  of  cost  systems,  47 


Verifying  stock  records,  86,  91,  194 
Voucher,    accounts    payable,     103, 
201 

Forms.  247-250 
Voucher  register,  104,  202 

Forms,  251,  252 


W 
Wage  systems,  70-79 

bonus  plan,  75 

contract  system,  78 

day  rate,  71 

differential  bonus  plan,  76 

differential  rate  plan,  74 

Gantt  system,  76 

Gillette  and  Dana  bonus  plan,  76 

miscellaneous  bonus  systems,  ^^ 

piece-work  plan,  72 

premium  plan,  75 

profit  sharing,  78 

relation  of  time  reports  to,  94 

stint  system,  ^^ 

stock  distributing,  78 
Waste,  30 
Weekly  time  report,  96 

Forms,  274 
Work  in  process  account,  122,  125, 

126 
Work  in  process  method — depart- 
mental system,  184 


__XjOA:tl-VBP^^ 


Tr>  91  A— 38w-5,'6{ 
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r,pneral  Library     . 


1  UUUOUOiC 


